Get Wonky: Should We Tax Capital Gains Like Income?

A society’s system of taxation is an expression of justice. How you tax, and who, and by how much, represents your ideas of fairness. It demonstrates your priorities as an organized group. The perfect tax system would be progressive–that is, those who had more would pay more; it would  universal–that is, there should be one set of rules, and they should apply to everyone; and it would be fair.

Fairness is the hardest part, not only to explain, but to implement. I’ll try to do the former in a post further down the line; as for the latter, that brings us to capital gains.

What are capital gains?

From the geniuses:

Capital gains are profits from the sale of a capital asset, such as shares of stock, a business, a parcel of land, or a work of art. Capital gains are generally included in taxable income, but in most cases are taxed at a lower rate.

We don’t need to get into a “land, labor, and capital” discussion right now. All we need to know is that a capital gain is the profit realized from selling an asset, like a stock or something. Those profits are taxed at a lower rate than income. Again, from the geniuses:

Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or less. Taxpayers in the 10 and 15 percent tax brackets pay no tax on long-term gains on most assets; taxpayers in the 25-, 28-, 33-, or 35- percent income tax brackets face a 15 percent rate on long-term capital gains. For those in the top 39.6 percent bracket for ordinary income, the rate is 20 percent. Short-term capital gains are taxed at the same rate as ordinary income. There also is a 3.8 percent tax on net investment income for single taxpayers with modified adjusted gross income above $200,000 ($250,000 for married couples filing jointly).

So What Are We Talking About?

We’re talking about bringing that top marginal rate on capital gains in line with the top marginal rate on income. So that 20% rate would jump up to 39.6% (with the ACA surtax). This is a popular position for people on the left to make, because it accords well with a “soak the rich” distributive tax model.

We know, anecdotally, that the wealthiest Americans get the most benefits from capital gains, and that the super-rich (the richest 400 Americans) get a larger share of their income from capital gains than all other Americans. This is supported by the data. In 2014, Americans collectively made $674.5 billion in taxable capital gains. The top 2% of American earners (those earning $1 million or more) received 64% of those gains ($431.9 billion). Check my math, I’m working from Table 1.4A.  According to the Tax Policy Center, that percentage is projected to be 75% by 2016.

There are opponents to raising the tax; in Forbes, Stephen Moore had this to say about then-candidate Hillary Clinton’s tax proposal (which included an increase in the capital gains tax):

The Hillary plan is almost all pain with no gain. It’s highly unlikely the tax hike will raise any money for the Treasury and if history is a guide it will lose revenue. After the capital gains tax hike in 1986 from 20 percent to 28 percent, capital gains revenues actually fell from $44 billion a year to $27 billion a year by 1991. After Bill Clinton cut the capital gains tax down to 20% again, capital gains revenues surged from $54 billion in 1996 to $99 billion in 1999. Lower rates, more revenues.

Paging Dr. Laffer, right? But actually, Moore might not be operating in entirely good faith. The geniuses again:

03_3

What you’re looking at is a chart the checks the correlation between the rate of taxation on capital gains and economic performance. No, more accurately, you’re looking at the absence of statistically meaningful correlation between the rate of taxation on capital gains and economic performance. There is stronger correlation between cheese consumption and death by bedsheet strangulation:

And according to the Washington Post, “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.”

“Murky” is certainly one way to put it.

There’s no real indication that capital gains actually help the economy by funding investment and startups, as proponents claim. JW Mason, of the Roosevelt Center, finds that 1 in 6 dollars of capital profits goes to investment in existing business, while only 1 in 10 dollars goes to funding startups. Jared Bernstein has this striking chart:

What About Double Taxation?

There is another argument to be made regarding capital gains: double taxation. The argument (if I understand it correctly, because remember, I’m just some dude, not an accountant) goes like this: when your corporation makes money, it has to pay taxes, meaning it has less money to hand out to its shareholders in the form of dividends. When it distributes that money, the shareholders have to pay a tax on the dividends, reducing its size even further.

Here’s how this guy puts it:

1. We earn income.

2. We then pay tax on that income.

3. We then either consume our after-tax income, or we save and invest it.

4. If we consume our after-tax income, the government largely leaves us alone.

5. If we save and invest our after-tax income, the government penalizes us with as many as four layers of taxation.

He has a chart!

I don’t accept that argument, and not just because I resent his mad flowchart game. Until we shift to a true consumption tax (ask me later), the best we can do is progressive taxation on income. From where I’m sitting (in front of a table piled high with comic books and gun solvent), the best way to ensure progressivity is to tax unearned income at a higher rate than earned income–or at the very least, at the same rate. 

This is not money you earned. This is not money you made. This money is a by-product of modern economics, magic money, wage witchcraft, income incantation,  pecuniary prestidigitation, smoke and mirrors on a global scale, flashing through fiber-optic cables like glints of light off falling coins, fast as dreams and only half as real. This is something out of nothing. It’s snake-oil economics, but instead of scamming the gullible,  it’s managed to build an entire world of bird bones and spun glass, one careful examination away from shattering like silence in a thunderstorm.

This is a tax on money that you get with no effort, and to even dare to imply that it was yours to begin with it and is somehow above taxation is to propagate an irresponsible and selfish mendacity that belongs on the lips of children, not wealthy men who presumably wear shirts with collars and know the names of different types of wine.

So Why Should We Tax Capital Gains Like Income?

First of all, it would increase revenue. According to the Tax Foundation’s Options for Reforming America’s Tax System, taxing capital gains at the same rate as regular income would raise $1.5 trillion over 10 years on a static basis (they make the more pessimistic projection of $569 billion over 10 years on a dynamic basis). They also project (again, on a dynamic basis) a 3.3% drop in GDP and a loss of 698,000 jobs over the course of 10 years.

I don’t want to scoff at that job loss, or scoff at that GDP decrease. But…

Second, lower taxes on capital gains don’t actually have anything to do with the economy. 

We saw that earlier. We know there isn’t a strong relationship between capital gain taxation and the economy. And we know that it’s not exactly true that those capital gains are really acting as investment boosters for the economy anyway.

Finally, taxing capital gains at the rate of regular income would decrease income inequality.

As Julia Ott puts it, The capital gains tax preference might seem wonkish, but it cuts straight to the heart of neoliberalism because fundamentally, it rests on the assumption that investors and investment matter most in our economy and in our society—and therefore, tax policy should privilege these actors and these practices. It presupposes that financial markets guarantee the economic self-determination of all those who strive to invest. And it assumes that those markets recycle capital gains back into the economy to fund entrepreneurs, business expansion, and employment—despite all evidence to the contrary.

For people concerned with inequality and injustice, images like the following are troubling.

inequality_pink_saez

Above is the distribution of income in the United States for the past hundred years (give or take). We can see that the share of national income held by the top 10% has been steadily increasing since about the 80s. The following images shows that the majority of that income for the very wealthy is coming from capital gains:

Screenshot_20170429-215155

Janet Orr again:

Eliminating tax breaks for income from investment won’t increase the wealth of black households or the wealth of households located below the 1 percent. But it could generate tax revenues for the kinds of public programs and investments that might. It could put a drag on the inexorable rise of the 1 percent and the persistent trend of financialization.

Nature is a system of inequalities and there’s no reason to expect our economy will be different. When men are free, some will succeed, and some will fail. It is not justice to say that a rich man must be made poor for the sake of some sense of vengeance. But justice should never see an increase in inequality; justice means that those who are advantaged shall not gain further advantage without helping the disadvantaged.

But that’s Rawls. He comes later.

 



Categories: Get Wonky

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  1. Fairness & Justice – The Georgia Wonk
  2. Get Wonky: Yes, A UBI Post – The Georgia Wonk
  3. Fairness and the Original Position – The Georgia Wonk

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