Nice piece from James Kwak in the Atlantic that if we really want to increase revenue, the low-hanging fruit is to raise the capital gains rate. Especially since the patron saint of tax cutters himself, Ronald Reagan had it much higher than it is now and because there’s no evidence that raising the rate would hurt economic growth:
Taxing income from investments the same as we tax income from labor would raise hundreds of billions of dollars in revenue almost exclusively from people who can afford it. So why isn’t anyone considering it?
Republicans don’t want to because, well, they are the party of the super-rich. Low taxes on investment income are the untouchable central plank of the Republican platform.
What about Democrats? President Obama has proposed letting the maximum rate on capital gains rise to 20 percent, where it was set in 1997 by President Clinton and then-Speaker Newt Gingrich, on households earning more than $250,000. But that’s it. And now Democrats seem to be warming to the idea of limiting itemized deductions, which purports to raise taxes on the rich but is relatively trivial to the super-rich.
Instead, why don’t they push for eliminating preferences for investment income, or at least raising the capital gains rate to 28 percent, where it was set by Ronald Reagan in 1986? They can’t possibly think it would be bad for the economy, since the evidence for any relationship between capital gains rates and economic growth is dubious. Since the tax increase would only affect the very rich, it would have little impact on consumption and economic activity. And wouldn’t it be great to fight for equal treatment of labor and capital, and a smaller national debt, at the same time?
My cynical instincts say that Democrats don’t want to upset the hedge fund establishment any more than they already have. But Barack Obama, you will never run for re-election again. Now is your moment. Don’t waste it.
Of course, Kwak already identified the problem. Current Republicans would absolutely try and destroy the country and eliminate every social program– heck even the military– before they’d give in on raising the capital gains rate. Policy-wise, this is a no-brainer. Politically, it’s a non-started. Unlike the income tax rates that revert to Clinton levels on January 1 and give Democrats the leverage, there’s no such reversion on capital gains rates (at least that I’m aware of). Kwak tries to frame this favorably be referring to the lower capital gains rate as a “loophole” but I don’ t think it is generally considered in the same category as mortgage interest deduction, etc.
Also, a nice interview with departing Senator Kent Conrad (in easily the biggest upset of the night on election day, Heidi Heitkamp is keeping this Senate seat in ND Democratic) in which he touches on the issue:
So do you think there are actually good policy arguments for raising tax rates on capital gains and dividends to raise revenue, as opposed to raising the individual marginal tax rate?
Sure there are. The argument against raising marginal rates is that has a very different economic impact than it does to raise capital gains taxes, or to raise capital gains and broaden the base. Broadening the base is seen by most economists as more efficient, with better incentives. And when you’re having [taxes on] capital gains and dividends at 15 percent, when everybody else is at 35 percent, it creates these incredible distortions in which very wealthy individuals are paying a fraction of the rate of those with far more modest incomes. You can see a rationale for doing it that way.
Plenty more good stuff in there from Conrad– a smart and thoughtful guy (or so says his deputy LD)– but wanted to limit this post to capital gains. It’s hard to see any movement on this in the short-term, but it would be great to see more Democrats begin to push back against the absurdly low 15% rate.