Friday, July 23, 2021

The Rich & Taxes

Nothing is for sure except for death and people complaining or disagreeing about taxes. This week the Washington Post Editorial Board weighed in with some thoughts on "The Smartest Way to Make the Rich Pay ..." (and it's not a wealth tax; looking at you, Senators Warren and Sanders). 

The basic gist of it is this: "it's the capital gains, stupid."

Fortunately, legitimate goals of a wealth tax can be achieved through other means, as the OECD report indicates. This would require undoing not only some of the 2017 GOP tax cuts, but much previous tax policy as well, which has produced a top federal marginal tax rate on capital gains of 23.8 percent — far below the top rate on ordinary income, which is 37 percent. The Treasury Department has aptly summarized the effect of this differential: “Preferential tax rates on long-term capital gains and qualified dividends disproportionately benefit high-income taxpayers and provide many high-income taxpayers with a lower tax rate than many low- and middle-income taxpayers.” The disparity “also encourages economically wasteful efforts to convert labor income into capital income as a tax avoidance strategy.” A notorious example of the latter is the “carried interest” loophole that enables hedge fund managers to characterize their multimillion-dollar annual compensation as lightly taxed capital gains.

I recall years ago that on a trip with our Debate team to Cal-Berkeley, one of our PF pairs was raising a heckuva ruckus in the early rounds by arguing from the position that if the United States eliminated the tax on capital gains it would not simply go to zero, but would instead shift those earnings to income, where the "gains" would be taxed at the individual's marginal rate. It was a brilliant curveball in the tournament, which flustered a lot of teams not ready for it. But at the same time, it made perfect economic sense to many of us. Capital gains should simply be taxed as income, for that is what they are.

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