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The biggest reason why you would want to use higher taxes on the rich and the nation’s largest corporations if you’re going to pay for stimulative job-creation measures is not just because these would be the least disruptive offsets for an economy waiting to heal. Just as high on the list is the fact that low taxes on the ultra-rich distorts the economy and makes future growth nearly impossible.
A perfect example of this comes from the Washington Post’s salutary article today on capital gains taxes. This is something that hardly even gets talked about anymore, but it’s at the heart of at least one of the pay-fors on the White House’s list, the carried interest loophole. The only reason that hedge fund managers are paying drastically lower tax rates is because the taxes on their capital gains, which they are calling their entire income, is drastically lower than the income tax. And this has produced massive inequality, pushed along by the rich contributors of politicians in both parties:
For the very richest Americans, low tax rates on capital gains are better than any Christmas gift. As a result of a pair of rate cuts, first under President Bill Clinton and then under Bush, most of the richest Americans pay lower overall tax rates than middle-class Americans do. And this is one reason the gap between the wealthy and the rest of the country is widening dramatically [...]
Advocates for a low capital gains rate say it spurs more investment in the U.S. economy, benefiting all Americans. But some tax experts say the evidence for that theory is murky at best. What is clear is that the capital gains tax rate disproportionately benefits the ultra-wealthy.
Most Americans depend on wages and salaries for their income, which is subject to a graduated tax so the big earners pay higher percentages. The capital gains tax turns that idea on its head, capping the rate at 15 percent for long-term investments. As a result, anyone making more than $34,500 a year in wages and salary is taxed at a higher rate than a billionaire is taxed on untold millions in capital gains.
While it’s true that many middle-class Americans own stocks or bonds, they tend to stash them in tax-sheltered retirement accounts, where the capital gains rate does not apply. By contrast, the richest Americans reap huge benefits. Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.
It’s a very long and very accurate article. This has been a problem ever since Alan Greenspan intoned that the proper capital gains tax rate was zero. That has led to moves ever closer to that ideal, and subsequent gains in overall wealth and political influence at the top. If the ultra-rich have a disproportionate share of the nation’s wealth, with political campaigns being what they are they will control the acceptable range of policy. As a result, you have an unbalanced economy. And inequality on this scale both damages GDP growth and makes the economy very susceptible to financial crises, as all that money looks for some gamble to strike it even richer.
And this has shifted over time. Ronald Reagan raised capital gains tax rates; under Clinton they were lowered. And now Republican candidates are talking about zeroing them out. This is despite the fact that there’s no empirical evidence to show that making rates on investment cheaper do anything to increase investment and grow the economy.
The Post has a great graphic identifying the winners of the capital gain tax cuts. That’s the policy reason for action: there’s just nothing to the argument that low tax rates help growth. Now, does it follow that lowering tax rates on wage earners, the effective outcome of cutting the payroll tax, is also an argument without merit? That’s the subject of my next post.
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It’s a hold over from slavery. Those “savvy businessmen” paid lower taxes on their slave labor, as compared to higher taxes a free man who actually did physical labor. (I wonder if the savvy business men also got to write down the depreciation of his “assets” as they aged?)
I don’t have a link but I read about a congressman from Louisiana(?) who claimed all his wages as Capital Gains. When the IRS came calling he told them to stuff it, that he wasn’t the Federal Government’s slave, and he’d take ‘em to court. They left him alone.
Setting aside the tax percentages and the total revenue, the most logical way to tax passive income is to do away with the corporate income tax and tax capital gains and dividends as ordinary income. You can make the ordinary income tax as progressive as you like, but there’s no need to add extra complexity into the system, especially since complexity is generally subject to gamesmanship by those with the means to hire the best lawyers and accountants.
add to that;
a well constructed “capitol gains tax’ will encourage re-investment back into our economy with job hiring incentives that offset the capitol gain
So far, the administration’s suggestion of paying for the “jobs bill” with ending or reducing some tax breaks that really only benefit the rich sounds great.
If we keep cutting taxes on the rich, we will have more jobs – in China.
Paris Hilton makes a good case for taxing inheritance at 99 percent.
It does sound great. But the uniparty won’t ever close those loopholes. It is a bait and switch, I think. Those loopholers are the ones who are dangling the $$s over the campaign warchests.
I hate these economics articles bc they are so stoopid.
So just one comment. If “flat tax” is soooo pro-growth, why not tax cap gains at same rate as income tax.
But I digres….
Income is income whether it comes from dividends, hedge fund activity or from actual hard work on the field. It needs to go through progressive taxation rates. Anyway that is the common sense comment.
If we can make any requests on this issue it should be to request for the proposed 0% tax rate is to rename it going by the trend of opposite name like say US Jobs Creation Modernization Tax which BTW is stated to never increase more than 0%. Make it applicable only for income above $1 million dollars and while at it remove any pesky barriers still left for private financing of public elections. Then we can really tune out of election process for good.
Empty rhetoric. Obama doesn’t want this, congressional Dems don’t want it, and Repubs obviously don’t want it. They’re just stalling while they raise the sledgehammer for the next round of ‘reform’ on the poor old and middle class.
I’m fine with Paris. At least she serves *some* purpose in the world. It’s Pete Peterson or Paul Allen I have problems with.
I think its a case of “suggest something that liberals like because the Republicans in the current villain rotation schedule will stop it from happening”.
I think you are more accurate in your description.
Speaking completely selfishly and off the record, I would be a million dollars richer had the current tax been in place when I inherited from my dearly departed aunt. Oh well. Timing is everything. If she could just have held on five more years (she would have been 102)
So glad to see Dday up to his usual excellent work. I saw this WaPo front page article (top left) as “salutary” and “accurate” indeed. Which is a stunning development for folks like me who have been reading WaPo as our home town paper for years and never saw any prior coverage that told the truth about how the “ultra-wealthy” got that way and how they stay that way.
WaPo in fact used the word “ultra-wealthy” (5th graf), also a rare event:
This coverage may have been pre-saged by a WaPo editorial back on August 8th during the debt-ceiling circus. For the first time in local memory, the Post endorsed higher taxes on the rich. We had fought a losing battle for five months to force DC Council to adopt the Mayor’s proposed new higher income-tax bracket on the rich, against persistent opposition from WaPo’s editorial board. Finally, when national catastrophe was imminent, WaPo began to speak the truth.
Most of us here are deeply cynical about momentary truthiness from the corporate press, so we should be suspicious about why WaPo has suddenly gotten all fact-oriented over the capital gains tax. But we should exploit it while it lasts.