Thursday, December 01, 2005

Capital Punishment

Kevin Drum asked for some input on a complicated topic yesterday...taxing capital:
I think taxation of capital should be at roughly the same level as taxation of labor income. However, I believe this mostly for reasons of social justice [me too!], and it would certainly be handy to have some rigorous economic evidence to back up my noneconomic instincts on this matter. Something juicy and simple for winning lunchtime debates with conservative friends would be best.

And the fact that Democrats might be able to use them in the public arena is eminently more useful to the country than Drum getting his sandwich paid for—so bring it on!. Edwards scratched the surface on this with his "reward work, not wealth" stuff. There were some good points (on both sides) in the comments (presented in chronological order):
OK -- If I buy and sell property in a three piece suit all day I'll pay 0% of the capital gains in taxes and if I buy, transport, distribute, and sell twinkies working 12 hours a day in a creaky old box truck I'll pay 30% of my net income in taxes.

Good lunchpail stuff there.
[link] Income is income, regardless of the source. A dollar I earn from working at my job is completely fungible with the dollar I receive from a prior financial investment. [...] The argument from the conservatives about the capital gains tax rate seems to be if we set it at the same rate as other income, no one will invest, they'll just spend it all. That's nonsense - I'll just look for a rate of return for my money that is appropriate given the bite taxes will take out of it.

A good point except for the "spend it all" part. That would be great if they spent it all, the worry presented is that they would hoard it all, keeping the funds out of circulation and the economy.
[link] Get Kevin's "I think taxation of capital should be at roughly the same level as taxation of labor income" settled first. And drop the "roughly." It doesn't matter where the income comes from -- flipping burgers, putting up with grandma, thinking up a killer app, investing in the market, or what -- if you have income, it should get income-taxed. All on the same rate schedule.

That's the only way I could be convinced to approach a flat tax. And this guy is not advocating for one (neither am i), but the bullshit argument that the tax code needs to be simplified is not a problem with the rates—that's easy, you just look it up in a chart. It's determining what income is income, and what isn't. Make it all income, and tax it all, then figure out what the rate schedule should be.
[link] There is no economic evidence whatever that a lower rate of taxes on capital gains increases "investment". There was no lack of "investment" in the go-go 1990s, when the capital gains rate was roughly double what it is today. In fact the market's collapse in 2000-2002 was due to too much investment, not too little. Now let me explain the quotes around "investment." Almost all of what passes as investment in the stock market is not investment at all; it is the transfer of property from one person (the seller) to another person (the buyer). Only initial public offerings, secondary offerings, and bond issues represent true investment (and the proceeds of many secondary offerings and bond issues are used to pay down debt, so they are not genuine investment either). Only a tiny fraction of all stock market transactions has anything at all to do with investment (money that goes to companies to create jobs and spur economic growth). It is simply untrue to link capital gains taxes with investment, and doubly untrue to suggest a cause-effect relationship.

That might be the best knock-down case, but it is hardly concise. And I'm not sure it's easily verifiable (or correct). But, frankly, the burden of proof should fall on the other side (the one advocating for endless debt). It doesn't, but it should.
And don't forget...Reagan's 1986 tax reform plan completely eliminated the preferential treatment of capital gains. As recently as 20 years ago all capital gains were treated the same as ordinary income.

That's a good one—throwing their "God" in their faces might actually be useful...

On the relief side:
[link] A person who takes a "capital gain", anywhere from The Donald day-trading to grandpa selling his house, is getting money from a bet. This is different than standard income, in that if you put your money into a company or stock or real estate or whatever, you can lose it all. It's risky.

A point worth considering. But isn't that a deduction? It doesn't make up for the loss, but it does factor in...

My opinion is based on very little knowledge. I am not an economist, nor have I ever had a lot of money or investments. If I suddenly got a six-figure income that allowed me room to invest to supplement my family's income, it seems preposterous to think I would refuse to invest because I will be taxed on any resulting income. It's the same as the bullshit argument that a progressive income tax rate penalizes me—am I going to turn down a $120,000 job because I'm in a higher bracket? Of course not. I will pay a higher tax rate, but I am still taking home significantly more money! If my investments gross me $30 grand, I would have no problem paying taxes on that. Maybe that's just because I haven't been rich (and therefore greedy) yet...

The investment arena is tricky stuff for me since I do not understand most of it. But one area I am crystal clear on—and, ironically, one I might stand to benefit from one day (from my wife's family)—is the estate tax. Abolising the "death tax" temporarily permanently or anything else is complete crap. That should be straight up income and taxed thusly. Period. The recipent of an inheritence did not invest or earn that money, and for that to escape taxation on that transaction is wrong. I don't care how many times conservatives claim it has already been taxed, the heir has never been taxed on it, and it is income to them. End of story.

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