All right. Let’s get wonky. We had a pretty good discussion on the virtues of the Buffet Rule on one of the Scott Brown threads.(E pluribus unum). The topic was the efficacy–the practicality, benefits (or lack thereof) of increasing the capital gains tax. Boston Shepherd put something from the Adam Smith Foundation on the table, Somerville Tom shot back with a CBO study, and aside from some amusing Red Scares, discussion was productive.
At root of capital gains taxes issue is one of fairness. If you buy into the Republican equation–rich people=job creators–giving them a break on earnings they didn’t work for makes some sense. As Greg Anrig at the Century Foundation writes,
As a matter of principle, income from investments should not be treated as more beneficial to society than income from work. The labor each worker engages in contributes directly to the economy day in and day out, while buying, holding, and then selling investment securities is a much more passive undertaking that may or may not add to the nation’s productive capacity. A man of leisure who collects $75,000 in capital gains income owes less in taxes than working parents holding down multiple jobs who together earn the same amount. It is long past time to restore a modicum of fairness to the tax code and end the tax-favored treatment of capital gains.
In short, taxing capital gains at a lower rate than other earned income is unfair. Our conservative friends argue that lower capital gains are good for the economy. Are they right? The relationship between tax policy and economic growth is complex. Capital gains tax cuts were a staple of voodoo trickle down supply-side economics, but it’s important to note the cuts weren’t supposed to work magically. As Anrig notes, “Advocates of the capital gains tax break have claimed for decades that the exclusion benefits the economy and all workers by encouraging higher levels of investment and savings, which in turn promote growth and prosperity.” Tax cuts, in spite of Republican rhetoric, are not pixie dust. If they are good for the economy, there has to be a mechanism–a connection between tax cuts and the economy–that lets them do so. “But researchers have never been able to demonstrate that such connections actually exist. Capital gains tax rates have gone up and down over the years with little apparent relation to economic performance, aside from fleeting effects on realization of capital gains when rates change.”
It’s this fleeting effect that happened recently in the United Kingdom. The rate dropped and taxpayers took advantage of the opportunity to enjoy paying lower taxes on capital gains. Revenue has risen, but those fleeting returns will diminish. Their are other reasons to oppose capital gains tax cuts (see Anrig), but here are the basic economic arguments against capital gains tax cuts:
Some have argued that reducing capital gains tax rates would increase short-run and long-run economic growth.The long-run level of output depends on the amount of saving and investment. Saving and investment increase the amount of capital in the economy and hence, aggregate supply (i.e., the amount of goods and services available in the economy). Many economists note that capital gains tax reductions appear to have little or even a negative effect on saving and investment. Consequently, capital gains tax rate reductions are unlikely to have much effect on the long-term level of output or the path to the long-run level of output (i.e., economic growth).
Furthermore, it is argued that a temporary or permanent capital gains tax reduction is an effective economic stimulus measure. An effective short-term economic stimulus, however, will have to increase aggregate demand, which requires additional spending. A tax reduction on capital gains would mostly benefit very high income taxpayers who are likely to save most of any tax reduction. Economists note that a temporary capital gains tax reduction possibly could have a negative impact on short-term economic growth. A temporary tax cut could induce investors to sell stock (i.e., realize capital gains by reducing the lock-in effect), but provides no incentive to invest since investors know they will face higher tax rates in the future. To the extent that the resulting sell-off depresses stock prices, consumer confidence, already low during recessions, could be further undermined thus reducing consumer spending.
The Buffet Rule may or may not be the way to tackle American upward redistribution of wealth, but at this point, it may be worth a try. Capital gains tax cuts are a boondoggle.
On page 171, economists Peter Diamond and Emanuel Saez calculate the optimum marginal tax rate for the upper end of the scale.
It is 73%.
the rule imposing a 30% tax rate is the “Buffett Rule.” The “Buffet Rule” has to do with how many times you can refill your plate. 😉
buffet as in wind, but there you go.
To me, its importance is as much symbolic as it is a real revenue raiser. It’s a matter of fairness for working families that trust fund babies shouldn’t get to have their income taxed at a rate that’s about half of what working families pay through their sweat, blood and tears.
Right now, people don’t feel as though our country is a fair place for working and middle class people and that needs to change.
Yet, the Buffet rule is not an answer to the revenue problems our country faces or a way to create the income necessary to reinvest in America, be it infrastructure or education or any other critical need we’re currently failing at delivering. It would just be a small piece of the pie that we need to fill, so we can get it cooking in the oven.
Letting the Bush Tax Cuts to the top 1% sunset would raise far much more money for the budget and is the most important way of addressing our budget problems.
Reforming Medicare Part D so Medicare could negotiate for drug costs, getting out of our wars and reducing the size of our military would all be the next biggest pieces. Add that to an economy that’s on the right trajectory (and I’m still not convinced it quite is, yet) and we’d be golden, maybe even have some money left over to start reinvesting in America’s infrastructure, education and clean energy independence.
start somewhere, somehow.