skip to main |
skip to sidebar
The Politics and Economics of the Capital Gain Tax
By Alan Reynolds.
"The Treasury Department is said to be studying
the idea of providing some sort of inflation-protection (indexing) for
the taxation of capital gains. Rep. Devin Nunes (R-CA) has introduced a bill (H.R. 6444) to do just that. Predictably, Washington Post writer Matt O’Brien instantly dismissed the idea as “Trump’s new plan to cut taxes for the rich.”
O’Brien relies on a two-page memo from John Ricco which yanks mysterious estimates out of a black box – the closed-economy
Penn-Wharton Budget Model. The “microsimulation model” predicts that
the Top 1 Percent’s share of federal income taxes paid could fall from
28.6% to 28.4% as result of taxing only real capital gains. “That’s
real money,” exclaims Matt Obrien.
No model can estimate how much revenue might be lost by indexing (if
any) because that depends on such unknowable things as future asset
values, future tax laws and future inflation. Yet Mr. Rico magically
“projects” future realizations to “estimate that such a policy would
reduce individual tax revenues by $102 billion during the next decade
[sic] from 2018-2027.” Does that imaginary $102 billion still look
like “real money” when spread over Rico’s extended 20-year “decade?”
It would be a microscopic fraction of CBO’s projected individual income
taxes of $21.1 trillion over that period.
One problem with the notion that indexing capital gains could only
benefit the top 5 percent (over $225,251 in 2016) is that it wrongly
assumes the capital gains tax only applies to stock market gains.
Another Washington Post article said, “Researchers have estimated that the top 5 percent of households in terms of income hold about two-thirds of all stock and mutual fund
investments, putting wealthier Americans in the position of benefiting
much more than others from any changes to capital gains rules.” But the
capital gains most likely to be seriously exaggerated by decades of
inflation are not gains from selling financial assets, but from selling real assets.
After many years of even moderate inflation, an unindexed tax may be
imposed on purely illusory “gains” from the sale of real property that
actually involve a loss of real purchasing power. A 2016 report from
the Congressional Budget Office and Joint Committee on Taxation, “The Distribution of Asset Holdings and Capital Gains”
reports that Americans held $7.5 trillion in stocks and mutual funds in
2010, but $12.2 trillion in private businesses and $8.5 trillion in
nonresidential real estate.
A related problem with conventional distribution tables is that they add realized capital gains to income in the year in which a farm, building or business is sold, which makes it true by definition that unusually large one-time gains are received by those with “high incomes” (including those gains).
A much bigger problem is, as the first graph demonstrates, that the
capital gains tax is voluntary: If you don’t sell, you pay no tax. When
the top tax rate on realized gains was 28-40%, very few gains were
realized – particularly among top-bracket taxpayers. When the top tax
rate fell to 20% in 1982-96 and 1997-2000, and to 15% in 2003-2007,
inflation-adjusted real revenue from the capital gains tax soared for
several years (market crashes in 2001 and 2009 overwhelmed taxes, of
course). This is just one reason static estimates of the alleged revenue
loss from indexing are not credible: The elasticity of realizations
is extremely sensitive to the tax rate and indexing is one way to
reduce that tax rate (and raise realizations) for assets held for a long
time.
If anyone wanted to cut taxes paid by the Top 1%, then raising
the capital gains tax rate is the surest way to accomplish that. The
second graph shows the Top 1%’s share of individual income reported to
the IRS (in data from Thomas Piketty and Emmanuel Saez) went way up
whenever the tax rate on capital gains went down. By contrast, top 1%
income from realized gains remained depressed whenever the tax was 28%
(1987-1996) or higher (1969-77). The rush to sell before an
increase in the capital gains tax in 1987 meant a third of all “income”
reported by Top 1% taxpayers in 1986 was from bunching the realization
of capital gains.
The inverted idea that a higher tax on capital gains is an effective way to “soak the rich” has not even been politically successful, because it is not so much an assault on investing as it is an assault on aging.
It is certainly true that people who have not yet accumulated much capital – which means most young people regardless of their current income – have also not yet accumulated capital gains. It takes time to accumulate capital, so vulnerability to capital gains taxes rises with age. And the U.S. has a rapidly-aging population.
When it comes to political arguments
for high capital gains taxes on capital gains, the redistributionist
left has never grasped that the people who are most fearful of high
capital gains taxes are not “the rich” but seniors. The table,
from the CBO/JCT study, shows that net capital gains accounted for only
1% of income among those age 35-44, 3% at age 55-64, and 6% for
taxpayers 75 or older. This little-known fact makes the politics of
advocating a high tax on capital gains more suicidal as a campaign issue
than many politicians have supposed.
George McGovern’s seemingly clever 1972 campaign slogan that “money
earned by money should be taxed as much as money earned by men” meant he
favored a minimum tax of 75%
on large capital gains (e.g., from selling the family farm or firm
before retirement). That frightened seniors who counted on selling-off
accumulated savings to finance retirement. Senator McGovern won only 36%
of the vote of those age 50 or more. A high tax on realizing capital
gains turned out to be bad politics as well as bad economics."
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.