The Bishop and the Butterfly: Murder, Politics, and the End of the Jazz Age
    Michael Maiello's picture

    Raise The Capital Gains Tax

    Since the 1990s, both the Democrats and Republicans have agreed that capital gains taxes should be kept lower than income taxes in order to encourage investment and to support the economy.  It's really pure trickle down theory and further proof for the cynical that whenever the Democrats and Republicans agree on something, it's bad.  Setting capital gains and dividend taxes at the same level as income taxes is the subject of my column today in The Daily.

    My favorite part about researching this one was unearthing all of the absurdities behind this.  Some will argue that if these taxes aren't kept low that people will refuse to invest.  But I'm merely suggesting they be at the same level that we tax wages.  Nobody seriously suggests that current tax rates are so high that most people will just stay home.

    Others make the moral case that because corporations pay taxes on their income that investors should get a break to avoid double taxation.  This is crazy on three levels. First, most people are double taxed anyway because they use their wages to buy things and wind up paying sales taxes that are generally not deductible (the IRS requires you to pick whether you want to deduct sales taxes, and supply a year's worth of receipts, or your state and local income taxes) and nobody is ever up in arms about this.  Second, a ton of big companies that sell stock weasel out of their taxes (ahem... GE, Carnival Cruise Lines and AIG) and so were never taxed anyway.  Third, there is an entire class of companies called Real Estate Investment Trusts (REITs) that don't pay federal income tax if they distribute 90% of profits to shareholders as dividends. Those shareholders have to pay taxes on those dividends at at the income level because the companies haven't paid taxes.  So when GE pays no tax, you get a break. When a REIT pays no tax, you don't.

    This one was pretty wonky, I admit, but I went into writing it with fairly light conviction and am now more sure than ever that the entire investment tax system should be eliminated and we should just admit the truth -- income from work and income from investing are the same darned thing and should be treated as such.

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    Comments

    Yes!!


    Capital Gains tax rates have to be considered in the context of  the overall tax system

    I can speak from personal experience.  When marginal tax rates were 70% the fact that the Capital Gains rate was lower Influenced me to start a company. I won't say positively that  I wouldn't have done so otherwise but I'm pretty sure  that's the case.

    I did. It was successfull. It employed about 20 people by the time I sold out, more now.

    I've argued several times here that the marginal rate should not just be restored to the level under Clinton but to something higher than that: the bank  traders who risked the existence of their employers did so knowing that if the risk went sour they'd be OK, their after tax return from their IC was enough if not for retirement , at least to finance their life style for long enough to get a new job- or to set up as an investment advisor.

    BTW prior to then I had been occasionally been subject to those pre Reagan marginal rates.I could discuss their impact  but that would be off thread.

    As long as the marginal rate is less than 40% I agree there's no reason for a different,lower, cap gains rate.  Once it get's about 50% a lower cap gains rate is worth considering.

    Certainly my experience is not conclusive, just a piece of data to take into account. 

     


    That makes a good amount of sense to me.


    OTOH -- eliminate it entirely and look for other incentives that could accomplish the same thing.

    The absolute worst part of our income tax system is how different classifications of income and their corresponding loopholes tempt taxpayers to dishonesty which then trickles out in every direction throughout society.   

     


    I agree with your general point. 

    I can't think of a substitute for a different capital gains rate but the fact that I don't think of one doesn't mean there isn't one .

    You probably know it's conventional world wide to take the cost of an item of capital equipment , divide it by ,say , 10 and over the following 10 years "depreciate " it that is take one tenth of it and subtract that amount from the company's profit then compute tax on the amount that's left.

    But in those supposedly anti capitalistic   Scandinavian countries the Government permits companies to double the cost of the equipment  then subtract that higher amount from profit before computing the tax. Which may explain why a tiny country like Sweden has one of the two or three leading  firms world wide  not just in Automobiles ( Volvo) but also  in Telecommunications ( Ericson) and in air compressors and their associated tools. (Atlas Copco). . And equally tiny Finland has Nokia. 

    So yes , there could be better approaches to stimulating investment than the favorable cap gains tax rate. 


    Using income as our primary tax created many of the divisions and problems we continue to squabble over.   Tacking on loopholes and subsidies just made them even worse.  

    Why do we not tax transactions and accumulations of capital before getting to income?  I know.   Many progressives will have a kneejerk reaction to the idea of a transaction tax but it is the simplest and fairest tax possible.  And it does not have to be the only tax.  Next up should be a straight up wealth tax on great fortunes to minimize dynastic ambitions.  Then maybe an income tax if needed. 

    Radical?  Yes.

    You said above that without the favored treatment of capital gains you probably would not have started your own business. What sort of business are you in that capital gains tax would make that much difference?  Hedge funds?

     


    I started a small cellular telephone company .


    If you dig a little deeper into the history of dividends and capital gains taxes you will find that prior to 1954 they were treated differently in a few different ways at different times.  However, you will want to adjust you thinking of what you learn there to update with the emergence of hedge funds, high speed trading, commodity futures speculators, etc.

    What I am getting at is the dividends were largely tax exempt prior to 1954, except 1936-1939.  If you have the resources (which I lack just using Google), then it might be informative to learn why dividends became tax exempt again after four years of being taxed when we were still in the Great Depression and facing eminate war?

    At times capital gains were taxed with increasing discount over longer terms (i.e., over 1, 2, and 5 years holding time instead of just short and long).  After 1954 merger activity increased greatly.  The first LBO was in 1955.  Mergers rarely achive greater economic efficiency.  Consolication costs include reduced competition and reduced internal investment.

    I could go on but it would be better if you did.  Low dividends tax rates incentivise long term investment while holding up equity value.  Low capital gains rates incentivise selling at a marginal gain over basis.