Capital gains and losses
September 14, 2011 Leave a comment
Great piece in the Post a couple of days ago about the Capital Gains tax rate. Hits on several key points.
First, despite always hearing about how important a low rate is to spurring investments, there’s not actually a lot of empirical evidence for this. Instead, we just get the discredited by the financial collapse, Alan Greenspan, insisting it is so:
The theory justifying low capital gains taxes has many philosophical fathers but none as influential as Alan Greenspan, the former Federal Reserve chairman who was treated as an economic seer for decades.
Greenspan said capital gains taxes made people reluctant to move out of one investment and into other, more-promising ones.
In 1997 congressional testimony, Greenspan said the “major impact” of the capital gains tax, “as best I can judge, is to impede entrepreneurial activity and capital formation.”
“The appropriate capital gains tax rate was zero,” he added…
These changes drove down the overall tax rate paid by the wealthy. In 1996, before the capital gains cut under Clinton, millionaires paid an effective rate of 30.8 percent. By 2007, it was 22.1 percent…
“Lower capital gains [taxes] are a mixed bag even if you’re just looking at efficiency,” said Leonard Burman, a professor at Syracuse University and former head of tax analysis at the Treasury Department. “It might encourage more risk-taking, but it also creates huge opportunities for tax shelters aimed at converting ordinary income to capital gains. People would make investments only because of the tax benefits.”
Moreover, he notes, given the recent financial crisis, it’s not clear that an absence of risk-taking is what’s ailing the economy…
Secondly, and sadly, the support for this needlessly low rate, is more bipartisan than it should be:
Yet as Congress debated the fate of the Bush tax cuts, a group of 47 Democrats wrote a letter to then-House Speaker Nancy Pelosi (D-Calif.) opposing any hike in the tax on capital gains or dividends…
And last, there’s a reason its bipartisan. Everybody loves political donations from rich people.
“Wall Street loves the preferential capital gains rate. All of America’s 20- or 30 million wealthy small investors love capital gains rates,” Sullivan said. “It’s just a tremendously popular item with political contributors. It’s something that directly impacts every wealthy household in America.”
End result, is that rich Americans often end up paying much lower effective tax rates than middle class Americans. Not suprising that we should have seen such a bifurcation and concentration of wealth in recent years. These charts tell quite a story:
As an economist explains, there’s some good reasons to have capital gains rates lower than the top income tax rate, but there’s nothing to justify the 20% differential, except for the fact that rich people really like it. Our society has become vastly less equal and has seen far too much of its wealth concentrated in a tiny percentage of individuals. This is not an accident, but at least in part a result of purposeful policy choices.