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
Footnotes:
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.
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8 responses so far ↓
1 Knox Marlow // Aug 21, 2011 at 2:56 pm
Peter,
I’m on Stewart’s (and Buffett’s) side of the fence on this one.
http://taxdidactic.blogspot.com/2011/08/buffett-bandwagon-part-two.html
Advocates of lower capital gains rates focus on the taxation of C corporations. However, investors recognize capital gains from all kinds of investments other than shares of C corporations. Those other investments don’t present the “double taxation” dilemma.
Note that I wouldn’t simply increase capital gains tax rates in the context of our current tax system. I’d lower ordinary income tax rates and increase capital gains tax rates in the context of a major tax reform overhaul. As part of that overhaul, I’d tax all business entities as flow throughs. So I’m talking about a major change to the existing tax paradigm.
2 Madrian // Aug 21, 2011 at 3:46 pm
Forgetting the ‘justness’ argument, I think there are good arguments for taxing capital gains at the same rate as other income. It would eliminate a chunk of the complexity of the tax code (in trying to determine what’s a capital gain and what is not, especially in the context of personal holding companies, PFICs etc.).
3 Peter // Aug 21, 2011 at 5:43 pm
Knox,
I assume you believe this because you think it would be good for the economy, not, as Stewart does, because it seems more fair.
4 Knox Marlow // Aug 22, 2011 at 12:21 pm
Peter,
This requires a longer response. Bottom line, I don’t buy into the arbitrary distinction between “income from labor” and “income from capital investment.” I believe that all income is income, and that the historical legal distinction between “ordinary” and “capital” income was driven by tax policy, not economics.
Because I believe that all income is income, I view arguments about “fairness” etc. as political levers to move the system in a more economically correct direction.
We should be aiming to reduce income taxes, which I define as taxes on all sources of income (both income from labor and income from capital investments). Assuming we need $x in income tax revenue, I’d collect the $x by imposing the lowest possible tax rates on all sources of income. I wouldn’t give a preference to one source of income over another.
(Ultimately, I believe that we should move to a consumption-tax based system, and so arguments about income taxes become more peripheral, but that’s an entirely different topic.)
5 Capital Gains Taxes are Too High, and are a Tax on Savings that Punishes Thrifty People for Inflation // Oct 4, 2011 at 2:32 pm
[...] gain due to inflation. The liberal economist Alan Blinder, a former Federal Reserve Board member, conceded in 1980 that “most capital gains were not gains of real purchasing power at all, but simply represented [...]
6 Please explain why capital gains taxes shloud not be taxed as ordinary income: - Page 35 // Oct 4, 2011 at 3:12 pm
[...] On the flip side, the theatrics of Obama and Buffet remind me of an observation by Peter Pappas at The Tax Lawyers Blog, the soak-the-rich crowd seems to think if a tax or policy appears unfair on its face, it must also [...]
7 eric // Jan 28, 2012 at 1:25 pm
“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. ”
That is pretty funny. Capital gains rates are available to anybody in the same way that Rolls Royces are available to anybody. But seriously, the problem with your argument is in setting up a strict opposition between equality of opportunity and equality of results. The two types of equality are directly related, and the cause/effect relationship goes both ways. If opportunity becomes less equal, results will probably become less equal; but it’s also true that if results become less equal, opportunity is less equal. So if we see results becoming less equal, it’s not unreasonable to expect that opportunity may have become less equal as well.
And at the extreme, it seems pretty obvious that you wouldn’t want a winner-take-all society, where some became rich and others starved, even if opportunity were completely equal. So it seems strange to pretend that the ONLY thing that matters is equality of opportunity.
And I would suggest that if you think arguments about optimal tax rates count as “class warfare,” you are either unduly sensitive or else cynically hopping onto a victimization bandwagon. Much of politics has always been a way of non-violently working out the interests of different groups, and if you take the position that you can’t do that in politics, then you might end up with real class warfare, which would do nobody any good.
I also have trouble understanding why “fair” should be banned from economic policy discussions. We live in a (sort of) democratic society, and it is probably a good thing that these issues are not being decided by technocrats entirely along the lines of what they imagine to be most efficient (top-down rule by the technocrats would end up looking a lot more like soviet Russia that you might now like to imagine.) And as long as you are hoping for the buy-in of ordinary people like me, fairness is going to seem like a good criterion.
8 Peter // Jan 28, 2012 at 2:25 pm
Eric,
Thanks for the civil comment:
1. The capital gains preferred rate is designed to favor people with capital i.e. Rolls Royces. When you make the cost of capital assets lower more rich people buy capital assets. The more capital assets – machinery, equipment, buildings, etc – the more jobs. This is why the capital gains rate is lower than the rate on ordinary income.
2. Measuring equality of opportunity by looking at the equality of results is Marxism. By definition, it requires that everyone have equal incomes and wealth because if they don’t, it’s proof of unequal opportunity.
3. What matters most in a free society is equality of opportunity. However, I do concede that we need a social safety net for those who cannot (as opposed to those who do not) take advantage of their opportunity i.e. the elderly, the handicapped etc. (not able-bodied men between the ages of 18 and 60)
4. The word “fair” shouldn’t be banned from discussion. We should endeavor to be fair. But I think fair is giving everyone an equal chance to succeed. Others think fair is making sure everyone has the same income and wealth.
5. Don’t be ordinary. Be extraordinary. There ought to be a reward for extraordinariness, don’t you think? Or would you prefer we live in a nation of mediocrity?