A columnist for The New York Times believes that the objective of our tax policy should be to enforce equality of results rather than equality of opportunity.
James B. Stewart is the latest in a long line of tax-the-richers who suggests that we should tax capital gains at the same rate we tax ordinary income:
In the end, the most compelling argument for equalizing tax rates on capital gains and ordinary income may not be economic efficiency, growth incentives, higher tax revenue or reducing the deficit. It’s simple fairness.
This is a striking admission.
Stewart, who authors a Times syndicated column called Common Sense, is actually saying that regardless of how beneficial the capital gain tax preference might be for the economy or for deficit reduction, it should be eliminated simply and solely because more rich people than middle-class people benefit from it.
Go ahead, read it again and absorb it.
If you had any doubts that some folks want to knock the rich down as much as they say they want to lift the poor up, Mr. Stewart’s comments should put them to rest.
For his coup de gras Stewart gives us the obligatory appeal to decency, fairness and the jettisoning of right-wing mean-spiritedness:
It’s hard to quantify or put a dollar value on a just society.
Apparently, Stewart believes that those economic and tax policy wonks who favor low capital gains rates based on the substantial evidence that shows that lower rates have a stimulative effect on the economy - evidence Stewart himself admits exists - are in favor of an unjust society?
This is just another in a long line of left-wing appeals to emotion designed to make the appellant (Mr. Stewart) appear magnanimous and his opponents (those who favor low capital gains rates) appear selfish, greedy and uncaring.
Well, I have some news for Mr. Stewart: It’s because we have a just society that we tax capital gains at lower rates than we do earned income.¹
Stephen Moore of the Concise Encyclopedia of Economics explains why:
The tax treatment of capital gains has unique features.
One is that capital gains are not indexed for inflation: the seller pays tax not only on the real gain in purchasing power, but also on the illusory gain attributable to inflation. The inflation penalty is one reason that, historically, capital gains have been taxed at lower rates than ordinary income.
In fact, Alan Blinder, a former member of the Federal Reserve Board, noted in 1980 that, up until that time, “most capital gains were not gains of real purchasing power at all, but simply represented the maintenance of principal in an inflationary world.”
Another strange feature of the tax is that individuals are permitted to deduct only a portion of the capital losses they incur, whereas they must pay taxes on all of the gains.
When taxpayers undertake risky investments, the government taxes fully any gain they realize if the investment has a positive return. But the government allows only partial tax deduction (of up to three thousand dollars per year) if the venture results in a loss. That introduces a bias in the tax code against risk-taking.
One other peculiar aspect of the capital gains tax has made many economists conclude that it is economically inefficient: it is a form of double taxation on capital formation.
Economists Victor Canto and Harvey Hirschorn explained:
A government can choose to tax either the value of an asset or its yield, but it should not tax both. Capital gains are literally the appreciation in the value of an existing asset. Any appreciation reflects merely an increase in the after-tax rate of return on the asset. The taxes implicit in the asset’s after-tax earnings are already fully reflected in the asset’s price or change in price. Any additional tax is strictly double taxation.
Take, for example, the capital gains tax paid on a pharmaceutical stock. The value of that stock equals the discounted present value of all of the company’s future proceeds. If the company is expected to earn $100,000 a year for the next twenty years, the sales price of the stock will reflect those returns.
The “gain” the seller realizes from the sale of the stock will reflect those future returns, and thus the seller will pay capital gains tax on the future stream of income. But the company’s future $100,000 annual returns will also be taxed when they are earned. So the $100,000 in profits is taxed twice—when the owners sell their shares of stock and when the company actually earns the income.
That is why many tax analysts argue that the most equitable rate of tax on capital gains is zero.
Don’t believe it when you hear tax-the-rich types claim that capital gains taxes are an economic fiction created to benefit the rich at the expense of the poor and middle-class. It’s utter nonsense.³
¹ Stewart, like so many on the pro-tax side, cannot see the beyond the surface optics: For him, if a tax or policy appears unfair on its face, it must also be unfair in substance. His logic goes something like this:
- Major Premise: You must have capital to have capital gains
- Minor Premise: Only rich people have capital.
- Conclusion: Lower capital gains taxes unfairly favor rich people.
³ The left is cynically counting on the fact that most Americans will never look beyond the soundbite that says more rich people benefit from capital gains taxes than do the poor and middle class. This, of course, is class-warfare propaganda because it avoids the fact that capital gains rates are available to everyone who buys and sells a capital asset, not only rich folks.
In other words, the poor and the middle class have the same opportunity to benefit from the lower capital gains rates. But this is not enough for Stewart and his ilk because for them a “fair” policy is one that produces equal results, not one that merely provides equal opportunity.
- Good News for Egalitarians: Number of U.S. Millionaires has Shrunk
- Who Lies About Taxes?
- Who Pays Taxes?
- Who Pays Taxes: Top 1% Pay More than Bottom 95%
- 51% of American Taxpayers Pay Zero Taxes; Share of Government Funded by the Rich Increases
- The Richest 10% Pay 71% of Federal Income Taxes
- More Statistics Showing that the Rich Pay the Bulk of U.S. Taxes