Sunday, September 23, 2012

Weekend must-read

A Capital Gains Primer, WSJ op-ed. This is a timely and valuable discussion of why capital gains taxes should be as low as possible (and preferably zero). When Clinton says that tax rates like Romney's won't help the economy, he is making two grievous mistakes: he fails to understand why tax rates on capital must be low, and he assumes that government is able to manage the economy's scarce resources better than the owners and creators of those resources. Here's a quick summary of the key points in the op-ed:

Amid sluggish growth that has prompted the Federal Reserve into unlimited monetary easing, it is hard to imagine a worse time to raise the tax on capital investment. None other than Lord Keynes wrote that "the weakness of the inducement to invest has been at all times the key to the economic problem."
First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses. 
Second, capital gains aren't adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. 
Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. 
The main reason to tax capital investment at low rates is to encourage saving and investment.


William said...

For all the talk about Socialist Europe, the last time I checked, major countries like Germany, France and The Netherlands had NO capital gains tax. AND their middle classes pay a larger portion of the total income tax than the middle class in the USA.

THUS, the very wealthy pay a lower portion of overall income tax in Europe than here.

Our tax system is horribly flawed.

Benjamin Cole said...

I have long thought that dividends should not be taxed. Eliminating the corporate income tax, now a relatively minor source of federal revenue, is another good idea.

This would lower the cost of capital--equity capital at that--to USA businesses, and give investors a reason to look for dividend stocks.

But then I believe in consumption taxes, especially luxury and sin taxes, and that will never fly in the USA. I also favor gasoline taxes.

What worries me about the GOP-right is that they are constantly talking about cutting taxes for virtuous reasons, but it just happens all those reasons pertain only to taxes that rich people pay.

Thus, we never hear (from the GOP) about broadening and lowering FICA taxes, or shifting federal taxes to consumption, perhaps exempting food and medical.

The GOP just doesn't have much credibility, and the Dems even less.