POLITICS JANUARY 24, 2012
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When it comes to taxes, the Republican primary electorate this year has a split personality. As ever, it demands that presidential candidates pledge to lower tax rates on the rich. But show it a living, breathing rich person whose effective federal tax rate is demonstrably low—say, Mitt Romney, who in 2010 paid 13.9 percent on his $21.7 million income, compared with about 25 percent for the typical middle-income family—and the GOP base is suddenly appalled. Republicans like the idea of being rich and not paying much in taxes, but give them too close a look at a candidate who’s living the dream and they’re enraged by the inequity.
Newt Gingrich has managed to caricature Romney as a top-hatted plutocrat while simultaneously proposing to lower Romney’s federal taxes from 13.9 percent to nearly zero. Gingrich would do this by eliminating the capital gains tax. Romney’s effective tax rate is so low because most of his income is from capital gains, which are taxed at a top rate of 15 percent. Romney, too, wants to eliminate the capital gains rate, but only at incomes below $200,000 a year. Under Romney’s plan, his own taxes would go down a little. Under Gingrich’s plan, they would go down a lot.
The problem here, obviously, is much broader than the income of one presidential candidate. Romney pays only slightly less in taxes than other rich people typically do. (His effective federal tax rate is not even the lowest of any recent presidential candidate: When John Kerry ran in 2004, his tax returns from the previous year showed that he and his wife paid a combined effective tax of about 13 percent, according to a calculation by The Washington Post’s Bradford Plumer.) A 2010 survey by the Center on Budget and Policy Priorities of the 400 richest taxpayers in America found that their average effective tax rate was 16.6 percent in 2007. As recently as 1995, this group’s average effective tax rate was 30 percent—nearly twice as high. The main reason is that the top capital gains rate fell during this period by about half. Part of this drop occurred in 1997, when President Clinton cut a deal with congressional Republicans to lower capital gains rates in exchange for creating the Children’s Health Insurance Program. President Bush lowered the rates further still in 2003. As a result, we are today ever closer to the situation described by Leona Helmsley when she infamously said, “Only the little people pay taxes.”
The standard argument for low capital gains rates is that they stimulate investment. But there is no plausible evidence to support this cherished hypothesis. In 2005, the Tax Policy Center, a nonpartisan joint venture of the Brookings Institution and the Urban Institute, compared capital gains rates to GDP growth over the previous 50 years. It found that there was no correlation. A follow-up study in 2010 by the Congressional Research Service pointed out that the drop in capital gains rates did nothing to halt the 30-year drop in national savings rates. Venture capital, the lifeblood of innovation, is almost entirely unaffected by capital gains rates, the study noted, because the main sources are college endowments, foundations, pension funds, and insurance companies—all “not associated with the capital gains tax.” The only stimulus that capital gains cuts reliably provide is to the incomes of rich people.
Under current law, the top capital gains rate is scheduled to rise next year from 15 to 20 percent. You’ll hear a lot in the coming months about how this tax increase will destroy jobs. That’s demonstrably untrue. Indeed, we’d like to see capital gains rates rise to the level of income taxes. For one thing, it would prevent the sort of tax-code gaming that occurs when wealthy investors disguise what’s actually income as capital gains, just so they can pay the lower rate. For another, a capital gains tax lower than the regular income tax causes the U.S. Treasury to forego a vast amount of revenue—and, given the budget deficit, that’s something we can ill afford.
But, perhaps most importantly, there’s a basic matter of justice at stake: Why should we tax labor at a higher rate than capital? Why should the wealthy be able to contribute at lower rates than other Americans? These were some of the principles behind a 1986 tax reform bill that taxed capital gains at the same rate as wages. It was signed by a notorious left-winger named Ronald Reagan. It did not cause the sky to fall. And it made America, however temporarily, a fairer place.
This article appeared in the February 26, 2012 issue of the magazine.
45 comments
From the article: "Why should we tax labor at a higher rate than capital? Why should the wealthy be able to contribute at lower rates than other Americans?" Because this money has already been taxed. It is savings and it is savings that has been put to work for more than a year. It's not money from some pump and dump stock scheme. The owner of this money--whether Mitt Romney or a Teacher Pension Fund--can opt to put the savings under his mattress or put it to work. It is better for all of us if he puts this money to work. To entice that behavior, the tax rate is discounted. And don't forget, this money will be taxed again when the person dies. The CBO wrote in 2002: "In general, there is significant consensus that broad-based reductions in taxes on capital have the potential to boost economic growth over the long run. Reductions in capital taxation increase the return on investment and therefore the formation of capital. The resulting increase in the capital stock yields greater output and higher incomes throughout much of the economy." For you to write "You’ll hear a lot in the coming months about how this tax increase will destroy jobs. That’s demonstrably untrue" is ridiculous in light of what the CBO wrote. Great output MEANS more jobs. Available capital means expansion. New buildings. People sweating. People welding. People driving machines. This stuff isn't a happy accident that is enabled by a policy wonk wishing it to be true. We've already seen what happens when policy wonks wish the sun was better at making cars go than oil. The authors write: " These were some of the principles behind a 1986 tax reform bill that taxed capital gains at the same rate as wages. It was signed by a notorious left-winger named Ronald Reagan. It did not cause the sky to fall. And it made America, however temporarily, a fairer place." Reagan agreed to an increase in cap gains as part of a comprehensive reform of the tax code. A major overhaul. He understood the value of a compromise (remember, leaders get things done in the face of adversity. They don't do nothing and blame the other side for stalling). And ironically, the CBO predicted shortly after that the 1991 taxable cap gains woudl be $269B. Instead, they were $108B. Ouch. Big drop in revenues. Pesky thing those facts, eh? Remember, people that have cap gains have enormous flexibility when and how to realize those revenues. If the conditions are not favorable, they do nothing. Always have. They will wait until a more favorable administration will reduce the rates. You are pitting the world's brightest against some gov policy hacks living in a crap apartment in a suburb of DC. No contest. It will NOT work out as the policy hacks think it will. The people with cap gains are not wringing their hands wondering how they are going to pay the electrical bill. Which takes us all the back to Charlie Gibson's question to Obama: GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent. But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent. OBAMA: Right. GIBSON: And George Bush has taken it down to 15 percent. OBAMA: Right. GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected? OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness. Ah, you see? It's ENVY all over again. It has nothing to do with more revenue. It has everything to do with punishing. And not just punishing the wealthy. Punishing everyone that relies on stocks for income. And yes, that means pensioners, retired firemen, retired teachers. And we know those pensions are already greatly strained. yes, let's almost double their cost of doing business. Perfect timing. Once you decide to focus on making it better for everyone (and not just punishing the rich), it's amazing how the details will work themselves out. Clinton knew this. His reign was some of the most incredible gains the wealthy have ever seen. IN THE HISTORY OF THE WORLD. But it dragged everyone else along. And they just didn't care. They were just happy for the ride. PS. Romney doesn't pay "slightly less than other rich people do" The top 1% ON WHOLE pay an effective tax rate north of 30%. See the CBO data. Other than these small points above, it was a great editorial.
- seattleeng
January 25, 2012 at 2:56am
"Because this money has already been taxed." I'm sorry, this is wrong in so many ways, it deserves to be put to death as an utterance. First, there is nothing unique about capital gains in this respect - I am taxed overall at a rate above the 25% average quoted in the editorial for the middle class. Last year I used some of my money to 1) buy locally grown food, 2) pay a plumber for some major repairs/renovations, pay physician's bills. So, the farmer, plumber, and doctor should not be taxed on any income they got from me, right? After all, that money "has already been taxed" at more than the capital gains rate. Second, money is not taxed. People are taxed, on their income in the case of FICA and income taxes. Taxes are fees
people
pay for the maintenance of government, and in a progressive tax system, the more you take in, the higher rate you pay. Discounting taxes for income earned in a specific way may server some larger purpose of the government, but if you think all people are equal under the law, it is fundamentally unfair to those people. It says, in essence, that if I start with nothing but my back and brain, and use those to earn income, I somehow owe society more than if I start with a fat bank account, and earn money through interest (which may or may not come from an actual investment in new productive capacity, since it could be drawing interest on government bonds sold to pay for the war in Iraq, e.g.), or stock appreciation. As for the CBO, they did indeed write there was a significant consensus on the value of lower capital gains tax. They did not write that there was evidence this consensus is correct based on empirical evidence. To believe that lower capital gains taxes increase investment, you have to believe that capital owning people overall would rather earn nothing by stuffing their money in a mattress, than take home, say, 10 cents less on each dollar of appreciation when they do invest. Hardly a likely conclusion amongst the capitalists I know (including myself).- IowaBeauty
January 25, 2012 at 7:46am
It's "long term" capital gains that are taxed favorably, the original justifiction for which being that the gain, accumulating over the long term, would be bunched in a single year (when realized) and taxed at a high rate in that year under our progressive tax system. That was true enough when ordinary income rates went up to 90% (70% as recently as the early 1980s), but not so true today with the highest rate at 35%. The recent justification, that the lower rate encourages saving and investment, is ironic: the world has been flush with excess savings to invest for years, the problem for investors being an absence of good investments. What's more, for all but the very few, capital gains are attributable to either the home, the gains from which are excluded from income (yes, homes at one time generated gains not losses), or 401(k), IRAs, or similar tax-favored vehicles that aren't subject to tax anyway. And finally, for the lucky few at the top, the taxation of capital gains is essentially elective (Ms. Helmsley was right) by the creative use of subchapter K (that's the provisions relating to the taxation of partnerships) and the ultimate tax shelter, death, which releases the investor (and his or her family) from ever being taxed on the pre-death gains. It's often said that a tax system must be viewed as fair by taxpayers or non-compliance will destroy the tax system and the government that depends on it for funding essential services including defense. From what I just described about the taxation of capital gains, how could anybody (except the fortunate few) consider the system fair.
- rayward
January 25, 2012 at 7:59am
A man works in a coal mine, gets lung disease and dies. Another man sits in a chair while his wealth is invested in the stock market and he might not even know where. Which man took the greater risk and which man is more important to the economy? I ask seattleng, it's fine to quote the CBO on capital formation or Charles Gibson on revenue increases, but where is the evidence that lower capital gains stimulate the economy when we have had low capital gains rates for the past 9 years!
- Nusholtz
January 25, 2012 at 8:48am
What Nush said. Bravo.
- tmmats
January 25, 2012 at 9:30am
I haven't seen Republicans appalled by Romney's tax rate. I've seen Republicans rejoice over his tax rate, and suggest it should be expanded to the rest of the tax-payers. They do this while ignoring that we currently have a trillion dollar budget deficit, and lowering rates further will just make that worse. More "starve the beast" crap, I guess.
- AllanL5
January 25, 2012 at 9:51am
One of the main ways that a person gets rich is by gaming the system. Poor people game the system, too, but for some reason they don't get rich. Capital gains taxes are not outrageous, like they were in the Fifties. In fact, they're at near historical lows. And many folks don't work for their capital gains. Why don't people who are making a bunch of money they don't work for just be semi-adults, accept a small increase in their taxes, and go on with their lives? One of the things they're doing now is setting an example for their children to get something for nothing. And many of these children can't wait for Mommy and Daddy to go on a vacation that they don't come back from. They don't want to work for a living. I'm sure they fight capital gains taxes, too. Human nature loves a free ride. And the rich are in on it.
- magboy47.
January 25, 2012 at 10:57am
Seattle, Gibson's numbers may reflect the incentive to take compensation in the form of, or convert income into, capital gains. The question isn't whether you get less revenue *from the capital gains tax* when you raise it, but whether you get less revenue from *all income tax.* I doubt that you do. Point is, a billionaire should not pay a *lower* effective tax rate than an ordinary citizen. That's just crazy, and every non-bastard -- i.e., someone who doesn't translate "fairness" as "envy" -- knows it.
- JakeH
January 25, 2012 at 12:30pm
Iowa writes: "I'm sorry, this is wrong in so many ways, it deserves to be put to death as an utterance. First, there is nothing unique about capital gains in this respect - I am taxed overall at a rate above the 25% average quoted in the editorial for the middle class." There is nothing wrong about it at all. The WSJ walks one through this yesterday (search for the title "Romney and the Burden of Double Taxation") Corp taxes seriously reduce the returns you see from market investments. To pick one of Romney's companies, Staples, the returns you see from Staples last year would have been 5.5% net profit if there were no corp taxes. And 3.6% net profit after corp taxes. If they generate a 5% growth in stock over a year, then it means had there been no taxes they'd have generated a 7.6% growth. That's 35% less that Romney was deprived of due to taxes. You can say the corporation paid them. But actually Romney, the investor, paid them in the form of reduced returns. If corp taxes went away tomorrow, then the entire value of the stock market would increase by almost 35%. That is very real money investors are losing to taxes. And on top of that, 15% MORE gets paid. So the effective tax rate on investments is 45%. The CBO wasn't unambiguous about the impact of cap gains rates at all. They also noted there was "significant consensus" about this. Why do you ignore it? Nutz writes: "A man works in a coal mine, gets lung disease and dies. Another man sits in a chair while his wealth is invested in the stock market and he might not even know where. Which man took the greater risk and which man is more important to the economy?" A guy like Jobs only had to sit in a chair to do his job. He created countless amounts of wealth for society. Do you think the coal miner is more valuable than jobs? We don't pay people for the risk they take. We pay people for the value they produce. If you produce $250,000 worth of coal in one year, then roughly you'll earn $50,000 (5:1 ratio, roughly whether its software or widgets). Now, if the risks get so high that nobody will take the risk, then the price of coal goes up, and the wage earned by the coal miner goes up. It's all very simple. But when you let your feelings start to guide you, then you will fail to take all the externals into account and screw things up. That is why Russia had excess toilet paper some months but not paper. And the next month the reverse happened. Nutz writes "I ask seattleng, it's fine to quote the CBO on capital formation or Charles Gibson on revenue increases, but where is the evidence that lower capital gains stimulate the economy when we have had low capital gains rates for the past 9 years!" Since the CBO has noted there is broad consensus on this theory that lower cap gains results in greater output, we can only assume things would have been worse if cap gains were higher during all this. Right? Allan writes: "I haven't seen Republicans appalled by Romney's tax rate. I've seen Republicans rejoice over his tax rate, and suggest it should be expanded to the rest of the tax-payers." Actually, all investors, big and small, enjoy this tax rate today, both directly and indirectly. If you have a pension, low cap gains are benefiting you ENORMOUSLY. If you have a 401K, same. If you invest yourself in stocks directly, same. This isn't someone available to the wealthy. It's available to everyone that has SAVED. Remember, the government uses taxes to encourage behaviors that are good for society. SAVING and then putting that savings to work is GOOD for society. JakeH writes: "Point is, a billionaire should not pay a *lower* effective tax rate than an ordinary citizen. That's just crazy, and every non-bastard -- i.e., someone who doesn't translate "fairness" as "envy" -- knows it." They do not pay a lower tax rate on INCOME. When their earn their first dollar, they pay a much higher tax rate than we do. But when the INVEST that dollar they just earned, they pay the same amount that you and I pay when we invest a dollar. Why is it so hard to grasp this? What is unfair about this?
- seattleeng
January 25, 2012 at 1:28pm
"And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money." Could be a bogus stat. If I'm looking to sell an appreciated stock, and there are signs that the capital gains tax rate will go down, I'm going to hold onto my stock and then sell it if the rate does indeed go down. That could lead to a splurge of selling that temporarily raises the revenue from the tax but does not indicate a long-term increase in revenues from the lower rate. A longer-term analysis is obviously needed. "It's ENVY all over again. It has nothing to do with more revenue. It has everything to do with punishing." We've discussed this before but.... It's not about envy. It's about fairly apportioning the burden of paying for services in a society that we say we want. And to most people, having a tax system where someone who makes $20 million (by not working, no less) pay less than 15% in taxes while others making far less (and working long hours) pay substantially more than a 15% does not seem like a fair apportionment. "The top 1% ON WHOLE pay an effective tax rate north of 30%." Yes, and it's one of the few things that keep the total tax burden from becoming regressive. http://economix.blogs.nytimes.com/2009/04/13/just-how-progressive-is-the-tax-system/ Moreover, it's pretty well-known that while the rhetoric is about the "1%," the issue is magnified at top of that 1% where the people at the very top of the scale do not pay that 30% rate. For instance, the effective federal tax rate for the top 400 earners has been around 16-18% the past few years. http://www.irs.gov/pub/irs-soi/08intop400.pdf As for investment, Warren Buffett has said that he never had a client turn down a deal because he said the capital gains tax rate was too high. There was strong job growth in Clinton's first term before the cap gains rate was lowered, indicating that those rates were not a significant disincentive to investment. When Bush further lowered the rates, we did not see an explosion in job creation. I understand the theory, but at some point theories should have to take reality into account.
- dsimon
January 25, 2012 at 1:33pm
@Seattle - so many lies, so little time. Your double taxation argument is not the standard one, but I'll refute both just to be clear. The standard double taxation argument says that capital gains are double taxed because corporations already pay 35% in taxes, then the investors have to pay on capital gains when they sell the stock. The reason this is wrong is because a capital gain is a different type of revenue than a dividend. If you buy a stock, hold it for five years, then sell it for what you paid for it, you do not get capital gains, but you got to keep all the dividends. These dividends *are* double-taxed. If you buy a stock and sell it the next day for a 20% gain, your gain didn't come because of the taxable profits of the business, it came because the market decided the stock was worth more. This appreciation is a capital gain, and it is real cash income to you... income that has never been taxed. Another way to think of it is, if I buy gold, the price of gold goes up, and I sell it, I have income. This income has never been taxed (there's no corporate tax on gold). More detail here: goo.gl/uM96n Now, your argument says that the income has already been taxed when he earned it, so appreciation should not be taxed when he invests it. This makes no sense ... income is income. Whether I get my income through a job or an investment should not, in a fair world, matter. Put another way, when I spend my money on clothes in most states, I have to pay sales tax. Should that be repealed as well? Double taxation! Taxes are typically levied when money changes hands, whether it be a retail sale, paying wages, or selling a stock. Since our society prefers this method to a wealth tax, where a percentage is levied on assets owned, the "same" money is going to be taxed hundreds of times as it keeps changing hands as it circulates throughout the economy. In terms of the tax increase "destroying jobs", let's talk about this when the economy is supply-constrained. Hint: when companies and investors are sitting on record hoards of cash, we are not supply-constrained. Your Charlie Gibson quote is way out of context as well. Let's finish the conversation: GIBSON: But history shows that when you drop the capital gains tax, the revenues go up. OBAMA: Well, that might happen, or it might not. It depends on what's happening on Wall Street and how business is going. I think the biggest problem that we've got on Wall Street right now is the fact that we got have a housing crisis that this president has not been attentive to and that it took John McCain three tries before he got it right. And if we can stabilize that market, and we can get credit flowing again, then I think we'll see stocks do well. And once again, I think we can generate the revenue that we need to run this government and hopefully to pay down some of this debt. "That might happen, or it might not" simply means that capital gains tax rates aren't the only thing that affects how well the economy does. If we cut rates and the economy does well, we could well get higher revenue; if we raise rates and the economy does poorly, we could well get lower revenue. But raising or cutting rates would not have been the cause of the higher revenue, or of the economy doing well. The right takes that causation as an article of faith, when in fact, there is no empirical evidence for it. As to Gibson's comments that taxes rose after rates were cut, what you were seeing there was investors selling off assets at the new rates and realizing gains. They had all these gains "stored up", and because they believed the rate cuts were coming, they held on to their assets until rates were cut. Then they sold. It's only a matter of timing. They would have recognized those gains eventually even at the higher rates, and you can see that as capital gains revenues fell in subsequent years after the initial spike.
- aaronsama
January 25, 2012 at 1:49pm
I just want to refute this point as well. The key that you don't seem to understand is that the corporate tax rate is already reflected in the price of the stock, and so investors don't just *sell* stock net of corporate taxes, they also *buy* stock net of corporate taxes. "Corp taxes seriously reduce the returns you see from market investments. To pick one of Romney's companies, Staples, the returns you see from Staples last year would have been 5.5% net profit if there were no corp taxes. And 3.6% net profit after corp taxes. If they generate a 5% growth in stock over a year, then it means had there been no taxes they'd have generated a 7.6% growth. That's 35% less that Romney was deprived of due to taxes. You can say the corporation paid them. But actually Romney, the investor, paid them in the form of reduced returns." You're confusing share price growth with profits. Investors have already priced expected future profits into the price they're willing to pay for the stock. If Staples hits the profit targets investors have, its share price doesn't change. If it comes in better, its price should rise; if it comes in worse, its price should fall. Corporate profits are taxed at the corporate level; the effect on price of a *change* in those profits from their expected level is not. Dividends are double taxed. Capital gains are not. Put another way, if Staples' expected future profits double, its share priced should double, whether the corporate tax rate is 0% or 35% or 95%. An investor who puts in $1 million will get a $1 million capital gain, regardless of the corporate tax rate. "If corp taxes went away tomorrow, then the entire value of the stock market would increase by almost 35%. That is very real money investors are losing to taxes. And on top of that, 15% MORE gets paid. So the effective tax rate on investments is 45%." It looks like Staples is at $16 today. All else equal, if corporate taxes were repealed, the price should rise to $25 ($16/0.65), so $16 is the taxed price and $25 is the non-taxed price. But the people who own shares worth $16 aren't losing any money due to corporate taxes, because they bought the shares at the taxed price as well. Similarly, after the taxes are repealed, new investors wouldn't be any better off than they are today, since they'd have to pay $25 for a share instead of $16. Repealing corporate taxes would reward speculators who bet on that event; but after the one-time jump, other than an increase in corporate dividends, everything else would be the way it is today.
- aaronsama
January 25, 2012 at 2:11pm
"The WSJ walks one through this yesterday (search for the title 'Romney and the Burden of Double Taxation')" Walks into a lamppost with it, more likely. The argument seemed unlikely to convince anyone except those who already believe against all the evidence that rich Americans are subject to savage, unconscionable rates of taxation.
- ironyroad
January 25, 2012 at 3:10pm
Aaronsama writes: "If you buy a stock, hold it for five years, then sell it for what you paid for it, you do not get capital gains, but you got to keep all the dividends." Not all stocks pay dividends. As cap gains increase, more in the S&P pay dividends. As cap gains decrease, fewer do. It another example of the tools the wealthy will always have to play with. Tax free municipal bonds are there too. You can bet if cap gains go up, then tax free munis become interesting again. Like I said: Some DC policy wonk living in a crap apartment isn't going to outsmart the rich guy with accountants. Aaron writes: "Whether I get my income through a job or an investment should not, in a fair world, matter" Do you agree that a guy with considerable wealth accumulation has the ability to just sit on his money? And do nothing? That is the safest, most prudent thing to do if taxes get to high. The purpose of tax policy is to encourage positive and discourage negatives while raising revenue. A tax policy that provides incentives to save nothing is crazy. There is a reason that OECD countries are reducing corp rates world wide, and also reducing cap gains world wide. Both encourage behaviors that are virtuous. Aaron writes: ""That might happen, or it might not" simply means that capital gains tax rates aren't the only thing that affects how well the economy does." To me it means the president doesn't care if revenue goes up or not. He thinks "fairness" matters more. When you combine it with his Joe the Plummer discussion, there's not much ambiguity around what he means. Aaron writes: "I just want to refute this point as well. The key that you don't seem to understand is that the corporate tax rate is already reflected in the price of the stock, and so investors don't just *sell* stock net of corporate taxes, they also *buy* stock net of corporate taxes." Yes, and if corp taxes go up by another 5% does the stock price go up, down or stay the same? It goes down because the company gives a lesser return for the same function. If cap gains taxes go up by another 5%, does the market go up or down? It will go down because the investments becomes less compelling (ie lower return). Take it to an extreme to convince yourself of this. If all gains from investments were taxed at 100%, then who would invest in Microsoft or Apple? Nobody, because investing then gives zero upside (it's all taxed away), only downside and risk. Ergo, with no bidders to buy, the price falls to zero.
- seattleeng
January 25, 2012 at 3:25pm
Why not instead of setting tax rates on nominal capital gains, which then have to be set lower than the tax rate on regular income to compensate for the inflationary loss, tax real capital gains? That is, if you bought a stock one year for $100/share and sold it sometime later when $1 buy year=$1.25 sell year, you would pay taxes on any appreciation like regular income, but with a cost basis of $125/share instead $100.
- sighthnd
January 25, 2012 at 3:48pm
@Seattle: You say: "Do you agree that a guy with considerable wealth accumulation has the ability to just sit on his money? And do nothing? That is the safest, most prudent thing to do if taxes get to high." Where is he going to be sitting on his money? In a bank or in low interest bonds? Then he is actually losing his money to inflation. He's going to keep investing in the stock market or in business because he will still make quite a large amount of money. Businessmen have been investing for decades as capital gains rates have fluctuated high up and down. They are clearly not the most significant factor governing economic growth. The 100% argument is foolish and has been used as an excuse to lower top income tax rates as well. The Laffer curve to the extreme. But even if you raise the capital gains rate a moderate amount, investors aren't going to just sit on their money. They'll still make a significant amount of money if they invest it and will want to. Businessmen aren't that naive. Just like people making top incomes aren't going to decide to be lazy if the top marginal income tax rate increases from 35% to 40%. If you believe that, then through similar logic, you could argue that food stamps and unemployment benefits make people lazy, and I'm pretty sure most people getting those benefits as they try to find employment or a better job would disagree. I will agree with you that if corporate tax and capital gains rates go up by 5%, the market prices could drop somewhat. But unless you plan on changing the tax rate every month, that's a one time change, from which the market will quickly equilibrate. You say: "The purpose of tax policy is to encourage positive and discourage negatives while raising revenue." The key there is raising revenue. Of course tax policy is designed to get people to do certain things as well, but the main issue right now is revenue. We need serious investments in infrastructure and education if this country is going to keep up. We also need to significantly reform medicare and social security. With an aging population, we simply aren't going to get all that money from cuts. And we have to focus defense spending onto the home ground and try to avoid anymore wars... The Bush tax cut expiration cannot come fast enough and knowing how this gridlocked Congress is going, there's no way any extension would pass.
- andyman344
January 25, 2012 at 4:07pm
seattleengFirst your quote: "In general, there is significant consensus that broad-based reductions in taxes on capital have the potential to boost economic growth" does not mean that there is a general consensus, as you claim. There is not a general concensus among economists that low capital gains taxes by itself will result in greater output, and we have 9 years of proof that that is not the case. Your point about people sitting down does not require a response. The point is that the justification of lower taxes from risk is not merited.
- Nusholtz
January 25, 2012 at 4:53pm
Nutz writes: "There is not a general concensus among economists that low capital gains taxes by itself will result in greater output, and we have 9 years of proof that that is not the case. " Nutz, how about a cite from some dissenting economists? Andy writes: "Where is he going to be sitting on his money? In a bank or in low interest bonds?" The market today is delivering about 7% inflation adjusted return over 60 years, with a 1 in 3 chance that any decade will be a loss. If you double cap gains taxes, then that 7% figure drops. Maybe not to 3.5%, but it drops by a fair bit. Now, think about this: Would you put your life savings into something that was going to give a 3.5% return averaged over 60 years, but at any time you could see something like what just happened where your entire portfolio was reduced by 40%? That value prop is getting risky. For 10% annual returns, it's a no-brainer. I'll risk a lot of money if there's a 1/50th chance of a 40% meltdown. The reason is because I can make it back in a decade. But for a 2-3% annual return, forget it. Not worth it. One dip and it'll take 30-40 years to make that back. What do you do instead? If you think the market risk outweighs the return, then you buy metals and land. But neither of those helps build a vibrant economy. Those investments are safe, but they tie up capital and just sit there. Those are where the wealthy in 3rd world countries put their money. Simply put: If your stock market cannot deliver much better than gold and real-estate, you are in a world of hurt.
- seattleeng
January 25, 2012 at 6:05pm
"Nutz, how about a cite from some dissenting economists?" seattleoink! Do you even read the articles upon which you opine? Look up this page and find: In 2005, the Tax Policy Center, a nonpartisan joint venture of the Brookings Institution and the Urban Institute, compared capital gains rates to GDP growth over the previous 50 years.It found that there was no correlation.
- Nusholtz
January 25, 2012 at 7:55pm
Let's also remember that capital gains taxes, unlike ordinary income, are deferred until realized. So while wages are taxed every year, and dividends (which are given preferential treatment) are also distributed one or more times a year, the value of a capital asset can build over decades and taxed only once when it is finally sold. That means even if all income is taxed at the same nominal rate, there is a huge investment advantage given to the capital asset because there will be a lot more left over after taxes. And that advantage is magnified further by the lower rate.
- dsimon
January 25, 2012 at 8:42pm
Capital gains and income should be taxed at the same rate. One of the reasons RONALD REAGAN (of all people) made the rate the same was that having different rates encouraged inefficient tax shelters whereby rich people played all kinds of games trying to turn what you and I would call ordinary income into capital gains. Again, this was done by that class envying socialist RONALD REAGAN. So even if (and it is a pretty big if) having lower capital gains taxes did anything positive, it still led to inefficient economic activity. At the end of the day, people may not like paying taxes but they like the government to provide the services they want. The money has to come from somewhere.
- SJ_LEX_LEO@YAHOO.COM
January 25, 2012 at 9:43pm
If raising cap gains rates does not impact growth and productivity, then I'm all for it. But everything we see shows that taxes has a significant impact on behavior. The cap gains in question here are small. President Obama's own estimates are this will raise revenue by $10B/year. That is about 1/7th of Bush's tax cuts for the wealthy. And about 5% of Bush's tax cuts on the middle class. And it's 0.2% of our government spend for the year. However, our GDP output for 2012 is $15.5T. If this decreases GDP output by 0.08% (an immeasurable amount), then the revenue gain from this is lost and we're actually in the hole. This 0.08% is so small that an economist wouldn't even pretend they can measure it. But again, consensus says it's there. We know taxes have a huge impact on behavior. Smoking. Discretionary consumer spending. Gasoline. A 25% increase in taxes will have an impact. It always does. To pretend a non-trivial increase in cap gains will not hurt GDP growth by any more than 0.067% is absolutely ridiculous. It is indefensible. Ergo, this is nothing but a feel good envy play. So, answer the Gibson question: do you want to raise cap gains if it results in less revenue for the government? And remember, if someone hurts the wealthy a little, it hurts the ones below them a bit more. And the ones below them a bit more. It's turtles all the way down.
- seattleeng
January 25, 2012 at 11:30pm
dsimon writes: "That means even if all income is taxed at the same nominal rate, there is a huge investment advantage given to the capital asset because there will be a lot more left over after taxes. " But that's available to everyone. Roth, 401K, pensions, health care plans, home purchases, land sales, stocks, etc. The government provides a myriad of programs to defer gains. If you are complaining that those that have saved more get more benefits, well, then, duh, that is the purpose of the benefit: To encourage a particular behavior. Saving is good. I see the person standing in line at Safeway paying for food with a gov card, and with the sleeve of tattoos that cost $1500. And I wonder to myself if that person has any clue that those tattoos will have cost them $50,000 by the time they are ready to retire. And then I remind myself that 1) No, they don't, and 2) the irony is that the person will likely spend money later in life to have them removed. They are doubly screwed. But hey, that was their choice. Somehow, though, the gov card buying their food bugs me a bit. There is no convincing people of the time value of money. You either get it or you don't.
- seattleeng
January 25, 2012 at 11:36pm
"But that's available to everyone. Roth, 401K, pensions, health care plans, home purchases, land sales, stocks, etc. The government provides a myriad of programs to defer gains." Yes, but the vast, vast bulk of capital gains go to the very wealthiest. Half of all capital gains go to the top one tenth of one percent. http://nymag.com/daily/intel/2012/01/richie-tax-break-that-wont-die.html Saying that these gains are "available" to everyone assumes that everyone has the money to access them. Contributions to retirement funds are limited. Lots of people can't buy a home, and of those that can, those who can get the most expensive homes benefit the most from the appreciation. Saying that these benefits are theoretically available to all is kind of like the reverse of the saying that the law in its majesty prohibits both the rich and the poor from sleeping under bridges. "If you are complaining that those that have saved more get more benefits, well, then, duh, that is the purpose of the benefit: To encourage a particular behavior. Saving is good." I agree that saving is good. But why encourage, and give a tax break to, those who don't need the encouragement? The wealthy already can and do save. So giving tax breaks for those who engage in the activity anyway is just a giveaway. "If raising cap gains rates does not impact growth and productivity, then I'm all for it. But everything we see shows that taxes has a significant impact on behavior." Capital gains rates don't seem to correlate with savings. http://www.slate.com/blogs/moneybox/2012/01/19/capital_gains_taxes_and_savings_rates.html "To pretend a non-trivial increase in cap gains will not hurt GDP growth by any more than 0.067% is absolutely ridiculous. It is indefensible." Where is the data? Again, we had strong job growth in Clinton's first term, before the cap gains rate was lowered in 1997. And Bush lowered them further, and the economy and job growth were anemic. One could argue that things would have been even worse if rates had been higher, but I think it's safer to conclude that the overall economy is just not that sensitive to a few percentage points change in tax rates from current levels. "I see the person standing in line at Safeway paying for food with a gov card...." This is supposed to be data?
- dsimon
January 26, 2012 at 12:11am
I suspect there are three very conflicting dilemmas intertwined. 1) How do we support public services? Schools, defense, health care, transportation, etc. 2) How do we maintain a sense of unity/identity/togetherness, a sense of fairness and a sense of just rewards for intelligence and effort that motivates us. 3) How do we maintain the clockwork of a humming economy, a tax collection system, a "Rube Goldberg" system that we call our economy that does not fly apart in our faces? There are definitely some conflicts in these three goals, and as soon as we tinker with one part of it (because it is never perfect and each degrades and suffers gaming and entropy over time), the others suffer. We are always a work in progress.
- skahn
January 26, 2012 at 12:34am
DSimon writes: "Where is the data? " The data is as presented. if you cannot look up Obama's estimates on cap gains revenue increases, then I'm not going to be able to spoon feed you. Search on "Obama cap gains revenue" (no quotes) and for the first link you'll get a very detailed workup from Heritage complete with sources. Not quite the same as mine, but feel free to pick theirs apart. But you didn't answer the question: Do you raise cap gains rates even if it means less revenue? Do you also ack that the revenues in play here are minuscule?
- seattleeng
January 26, 2012 at 1:20am
seattleeng: "The data is as presented." I'm talking historical data. You provide no cites for your assertions. The burden of providing proof is on the one making the claim, otherwise people could make all kinds of wild assertions without backing them up. It's not spoon-feeding, it's taking responsibility. The Heritage Foundation piece has no historical data. And remember all those people who said that the Clinton tax increases would cause the struggling economy to go back into recession? I'm sure they had studies too. At some point, all the economic theory has to account for reality. If you're interested in another study, you might want to check out the CBO's take on the matter from 1988, http://www.cbo.gov/ftpdocs/84xx/doc8449/88-CBO-007.pdf "The statistical results offer additional support for the view that higher tax rates do lower realizations of capital gains. As a result, increases in tax rates on capital gains produce much less revenue than they would if taxpayers' behavior were unaffected. On the other hand, simulations using the estimated behavioral responses still show a net revenue increase from the 1986 act. They also indicate that lowering the top rate on long-term capital gains to 15 percent would result in a net revenue loss." "Do you raise cap gains rates even if it means less revenue?" Perhaps not, but I don't think it means less revenue. I provided a lot of evidence that behavior doesn't hinge on moderate changes in cap gains tax rates from present levels. Also, from the CBO study cited above: "the results of some of the studies imply that lowering tax rates on capital gains from the high level they reached in the mid-1970s increased revenue, but none of them implies that the increase in the top rate from 20 percent to 28 percent in the 1986 act caused a revenue loss." I'll take evidence over theory, thank you. Whether the revenues are miniscule depends on how you look at it. If the $10 billion a year number is accurate (again, no cites are provided), that's 10% of the cost of the health care reform law. I'd say that's a good chunk of change towards an important policy goal. As they say, $10 billion here, $10 billion there, and pretty soon you're talking real money....
- dsimon
January 26, 2012 at 11:32am
I guess I can summarise seattle as follows: When the Tax Policy Centre, staffed as it is by wild eyed partisans (they even proclaim their ideological basis on their website) concludes that, based on the historical record: In 2005, the Tax Policy Center, a nonpartisan joint venture of the Brookings Institution and the Urban Institute, compared capital gains rates to GDP growth over the previous 50 years.It found that there was no correlation. it's not really worth considering since it doesn't fit my preconceived notions. Although there's plenty else in their report that I like and hence cite, this bit is no good. However when the Heritage foundation, staffed as it is by sober non-partisans doing yeoman's work in a strongly peer reviewed arrangement, in an attempt to empirically answer policy questions put out a speculative piece - that's the go-to work. However since we're being selective, make sure that you ignore that the Heritage Foundation has a bit of an unfortunate track record of predicting that any increases in taxes will reduce revenue and all cuts will increase them, which haven't played out too well. Similarly, it makes perfect sense to trot out simplistic platitudes and just ignore that the historical record indicates that economic growth and tax rates income & cap gains taxes are at best uncorrelated, and possible (in the experience) negatively correlated. Taxes up = revenues down sounds much better (capital will go on strike! One of these days). I believe I am ripping of rayward here, but often you can have a neat theory or a predictive one.
- Nari224
January 26, 2012 at 1:58pm
That all being said, I do enjoy and appreciate that seattle does posting here.
- Nari224
January 26, 2012 at 2:00pm
DSimon, the CBO quote on cap gains taxes IS backward looking and as authoritative as it gets: We're going to go through this line by line, one at a time. "In general, there is significant consensus that broad-based reductions in taxes on capital have the potential to boost economic growth over the long run. Reductions in capital taxation increase the return on investment and therefore the formation of capital. The resulting increase in the capital stock yields greater output and higher incomes throughout much of the economy." Does this statement reflect that the consensus of experts, both looking back through time and forward into time, generally believe that reduced cap gains taxes will result in greater output (GDP)? Generally speaking. I'm not yet wondering about specifics. Just in general.
- seattleeng
January 26, 2012 at 4:36pm
DSimon writes: "Perhaps not, but I don't think it means less revenue." OK, good. We have a starting point. If it means more revenue, then I would also want to increase them. But as Obama has predicted, it's only $10B in revenue that he believes this will raise.
- seattleeng
January 26, 2012 at 4:38pm
Nice of you to say, Nari, I learn a lot going back and forth with folks here and it has a bigger impact on my politics than you might expect.
- seattleeng
January 26, 2012 at 4:43pm
I won't be adding to the discussion here in the comment section, except to say that there is a reason that I continue to subscribe to TNR and it's primarily because I can engage in thoughtful discussions (passionate or otherwise) with the folks that post on the boards here or simply read through comments and learn just as much.
- singlspeed
January 26, 2012 at 5:56pm
seattleoink! I read your Heritage article on capital gains and it misses the point. Which will produce more economic growth, lower capital gains rates or lower income tax rates? Small businesses, which are called the job creators, do not benefit from lower capital gains rates. Ask someone if they would rather invest $100,000.00 in the stock market at a 15% tax or $100,000.00 in a small business taxed at 35% and up and you will see why lower capital gains taxes have done nothing to stimulate our economy.
- Nusholtz
January 26, 2012 at 7:37pm
Nutz, do you want to increase cap gains if it results in less revenue?
- seattleeng
January 26, 2012 at 8:07pm
The standard argument for low capital gains rates is that they stimulate investment. Hmmm, I thought the standard argument was that one shouldn't tax an illusory gain produced by inflation.
- karlwk
January 26, 2012 at 8:17pm
seattleoink! Read your heritage article. The loss of revenue is temporary. After gains adjust to new market conditions, revenue will increase.
- Nusholtz
January 26, 2012 at 8:35pm
seattleeng: "If it means more revenue, then I would also want to increase them. But as Obama has predicted, it's only $10B in revenue that he believes this will raise." So if you believe Obama, then you're in favor of raising the rate. What then are we arguing about? And if the CBO is authoritative, why not believe their 1988 analysis that I cited and quoted--that lowering the rate to 15% results in a net revenue loss, and that no study showed that raising the rate from 20% to 28% resulted in revenue loss? Your CBO quote says "potential." Yes, it has potential. I understand the argument. But it has to be backed up by evidence to see whether it's right. If we want to use stock markets as a measure, European stocks did as well as US stocks after 2003 when the US cut its cap gains tax, even though Europeans did not do so. Also, I allowed myself to get distracted by the argument that deferring taxation encourages savings. That wasn't my point. The point was that even if one had the same nominal rate for capital gains as for other "ordinary" income, the cap gains treatment is still preferential because taxation is deferred until realized. That government sets up other vehicles to encourage saving isn't material to that fact. Plus, as I noted above, capital gains tax rates do not seem to correlate with savings.
- dsimon
January 26, 2012 at 8:48pm
capital gains tax rates do not seem to correlate with savings It depends on the other forms of investing and the taxes on them. If the capital gains tax went to 100%, companies would strive to pay out dividends instead and do everything possible to avoid raising stock values. If the tax on profits/dividends were also 100%, equities would be killed and business would have to operate on loans/bonds--which would probably make the economy rather less stable. Ideally, the tax code would be neutral, but I don't think it currently is. Dividends are taxed twice with a compounded marginal rate as high as 45%, so companies are encouraged to make stock buy-backs, try empire building, etc.
- karlwk
January 26, 2012 at 10:49pm
DSimon writes: "So if you believe Obama, then you're in favor of raising the rate. What then are we arguing about?" Because I don't believe everyone will continue to invest the way they do. I will not. I will cash out stocks before this hits. And I'll sit on them until a new policy comes along. Obama has assumed that everyone will continue to invest the way they invested if cap gains go up. His analysis is static. This is the point Heritage walks you through. Obama's not hiding it either. Read the text. History has shown people do not behave this way. The administration has in fact published their own sensitivity analysis, and OBAMA estimates that a 0.01% reduction in economic growth would WIPE OUT THE GAINS OF THE INCREASE. See the details in the Heritage paper I cited. That is from the President's own administration. So, your believe is that the 33% increase in cap gains will only blunt growth between 0% and 0.01%? That is a razor thin area of land you've staked out there. Razor thin. The odds of it landing in there are a million to 1. And on one side of that it means GDP and revenue grows due to the extra taxes (wont' happen). And on the other side it means GDP and revenue drop due to the extra taxes. Man...
- seattleeng
January 27, 2012 at 3:25am
DSimon writes: "And if the CBO is authoritative, why not believe their 1988 analysis that I cited and quoted--that lowering the rate to 15% results in a net revenue loss, and that no study showed that raising the rate from 20% to 28% resulted in revenue loss?" Ah, yes, let's look at how the CBO analysis from 1988 fared. From the WSJ in 1993 "From 1988 through 1991, inflation-adjusted taxable capital gains plummeted, remaining below the 1985 level every single year. In fact, inflation-adjusted taxable capital gains in 1991 were half what they were in 1985 and lower than they have been in any year since 1978. The drop-off has been so dramatic that in 1991 the federal government took in 21% less revenue at 28% than it did in 1985 at the 20% rate. A soon to be released study by the Republican members of the Joint Economic Committee yields this interesting scenario: Had capital gains rate remained at 20%, and had capital gains continued their 12% rate of growth from 1980 to 1985, the government would have netted $60 billion more in capital gains revenues in the years 1986-91." In other words, the static analysis done by the CBO in 1988 was as bad as other static analysis. It foreshadows what President Obama's analysis will be. But, I'm glad we have this thread hammered out in such detail. One of us will look like a genius in 2-3 years. If what happened when Reagan raised cap gains happens again, this this move will prove to be as I've said all along: Driven by envy and appearance. It will hurt the government.
- seattleeng
January 27, 2012 at 3:32am
Seattleoink! This is an example of a common error. When the government gave a personal tax exemption for blindness, blindness went up. When you lower the tax on capital gains, investors shift away from higher taxed income, like small business income, to capital gains income in the stock market. It is a mistake to only look at the small picture of just capital gains. Right now low capital gains rates are not helping.
- Nusholtz
January 27, 2012 at 8:00am
Nutz, this has a rather simple explanation, doesn't it? It simply means that previously blindness was under reported because there was no incentive for reporting it. In fact people weren't poking their eyes out to pick up the deductions. "Right now low capital gains rates are not helping." The WSJ notes today that this shift puts the US at the worlds 3rd highest (behind Denmark and Chile for cap gains), and our corp tax rate is 35%, with just Japan ahead of us there. You guys are foolish to think this will have no impact. In recent NYT piece on Apple and their manufacturing juggernaut, it was telling to hear President Obama cluelessly ask: "Why can't you bring the jobs back?" It shows how little he (and most liberals) understand about all this. You think every knuckle you apply to business wont' really matter (it's such a small knuckle, after all), and then you breathlessly wonder why things aren't working out for the little guy years later. In any case, it'll be fun to look back in a few years at this thread.
- seattleeng
January 27, 2012 at 12:49pm
seattleoink! Actually, blindness went up when it pays for it go up. Just like capital gains goes up when it pays for people to shift their income from ordinary income to capital gains. The conservative dogma that lower taxes will necessarily help the economy is odd considering that Clinton raised the rates and the economy was fine. Bush lowered the rates and the economy did poorly. How conservatives can't see this is one of the world's mysteries. Now, that's another example tax blindness!
- Nusholtz
January 27, 2012 at 4:31pm
seattleeng, your quote from the WSJ piece makes a classic conflation of correlation and cause. If stocks are booming, which they were during that time period, why would I sell my stock under any circumstances regardless of what the capital gains tax rate was? Churning the portfolio and incurring a tax on every sale drastically reduces the post-tax return. So if revenue from the tax was down, it can be due to many other factors than the change in the rate. This is another example of not providing nearly enough information to draw the desired conclusion, an error I've pointed out repeatedly in other threads. (Plus, it would be greatly helpful if you included actual links. This is hardly the first time such a request has been made.) Indeed, economists and government agencies have been making this same point for some time. From a 2008 TNR article on Gibson's flawed logic in the interview you cited earlier: "Joint Committee on Taxation and Treasury both score raising capital gains taxes as raising revenues. There is some behavioral response but much of that is timing and doesn't affect the medium-to-long term revenue loss.Note that the experience after the 1997 cut and the 2003 cut is not a meaningful way to assess the impact of capital gains tax cuts on revenues because so many things were happening simultaneously. The JCT score of the capital gains cut in 1997 was a few billion dollars annually. The 2003 cut was something like $5 billion annually. But capital gains revenues can go up or down by tens of billions annually. So it is hard to look at the noisy data and infer ex post the revenue impact of these changes." http://www.tnr.com/blog/the-plank/sorry-charlie-youre-wrong-the-cap-gains-tax "I will cash out stocks before this hits. And I'll sit on them until a new policy comes along." Cashing out before a rate goes up can be a reasonable thing to do. Failing to make an investment when it's the best return around with a 20% tax rate just because one is angry that the rate isn't 15% anymore would not be a reasonable thing to do. Warren Buffett has said that that difference has not been a factor with anyone he's worked with. I don't see good historical data as to why I shouldn't believe him. "the static analysis done by the CBO in 1988 was as bad as other static analysis." Isn't the CBO data I cited historical? And didn't you say that the CBO is as authoritative as it gets? Why are the CBO's historical conclusions blithely dismissed? Or are they trustworthy only when they fit your conclusions? As far as "dynamic" analysis goes, I'd bet one could find dynamic analyses that don't pan out either. But that would require looking for evidence that might actually challenge one's convictions. "and our corp tax rate is 35%, with just Japan ahead of us there." Come on, you must know this is a canard. Few businesses pay the statutory rate because of exemptions and deductions. Our effective corporate tax rate puts us pretty much in the middle of the pack of our peer countries. Our effective rate in 2008 was 27.1%; the weighted OECD average without the US was 27.7%, the unweighted average without the US was 23.3%. http://assets.opencrs.com/rpts/R41743_20110331.pdf Again, it seems to me that the overall economy just isn't that sensitive to a few percentage points change in marginal tax rates, or, for that matter, capital gains tax rates. It also seem to me that further argumentation over these matters is futile, that I could present all the data and point out all the logical flaws in the matter and some minds would not be changed. I only point out those flaws to try to prevent them from proliferating.
- dsimon
January 28, 2012 at 12:59pm