Capital Gains

Mostly what Atrios said. But beyond that, a political movement that's interested in providing new public services requires revenue to pay for those services. To get the revenue, there have to be increases in the overall level of taxation. Those increase should take a progressive form -- the rich should pay more.

But it's absolutely crippling to any effort to outline policy with any level of ambition to concede the idea that any tax that places any burden whatsoever on the non-rich is therefore unacceptable. It's fairly easy to design revenue measures that fall mostly on the rich, but extraordinarily difficult to design measures that exclusively snag people who fit a conventional definition of rich. It's true that a married couple composed of an NYPD detective who pulls lots of overtime and a NYC public high school teacher with a lot of seniority can have a joint income of over $200,000 a year but a tax hike on the $200,000k+ crowd is still, all things considered, an extremely progressive measure.

Comments

"It's fairly easy to design revenue measures that fall mostly on the rich, but extraordinarily difficult to design measures that exclusively snag people who fit a conventional definition of rich."

It's actually pretty easy to design taxes that exclusively snag the rich -- the income tax was initially designed that way, back in 1913. But that was long before Medicare and Social Security.

Raising capital gains tax rates discourages risk-taking and investment in this country, which, by extension, discourages research & development, innovation, and job creation. Probably not the best tax rate to raise 86%, as Obama has said he would do.

Posted by Fred | April 28, 2008 10:41 AM

I predict a wealthy vs lots-of-income debate in this thread.

The very wealthy/highest income earners don't really depend on income or are able to recharacterise their income to a more advantageous tax rate. The high W-2 oriented income earners (you say > 200K) but less than 400K, will probably bear the brunt as they have fewer opportunities to recharacterise earnings. Sole proprietors (store owners, resturanteurs, consultants, etc.) will continue to cheat the system in greater numbers.

It would take more details to determine the impact on revenues (obviously) but any "fairness" exercise needs to take into account: closing ultra-wealty recharacterization of income/gains/dividends, closing reporting gap on sole proprieters, AND closing many corporate welfare loopholes.

Posted by mike c | April 28, 2008 10:45 AM

Last year a single hedge fund manager named John Paulson made almost $4 billion. This is more than the combined salaries of every teacher in the New York public school system.
http://www.alternet.org/blogs/peek/83545/
Just by raising taxes on people who earned over $3 billion, you could raise more money than by increasing the taxes of every schoolteacher in New York.

It would be easy to raise taxes on Paulson and leave the teachers alone. You couldn't get it through Congress, because too many Dems are owned by hedge fund managers, but the idea that it would be "extraordinarily difficult to design" such a tax seems unlikely to me.

Posted by Bloix | April 28, 2008 10:45 AM

Sigh. I truly believe Democrats will never be able to truly implement their agenda in any meaningful way until they develop a more nuanced understanding of tax policy than "the rich should pay more."

Should distributional effects be considered when making changes to tax policy? Sure. But they're about the thirteenth most important aspect, not the first. This is why Fred's point above gets overlooked. Sure, the capital gains tax mostly hits the wealthy, but the fact remains that capital gains are a bad thing to tax.

Posted by right | April 28, 2008 10:48 AM

A better tax to raise would be one on consumption. If it isn't feasible to tax consumption directly at the federal level, it can easily be done indirectly. For example, income taxes could be raised slightly across the board, along with a corresponding increase in the amount of tax-deductible contributions tax payers can make to IRAs, 401ks, and other retirement accounts. Taxpayers taking advantage of the increased contribution levels wouldn't pay any higher taxes, but they would be saving more and consuming less; those who didn't take advantage of the increased contribution levels would be paying a de facto consumption tax.

Posted by Fred | April 28, 2008 10:49 AM

No, Fred is wrong. 99% of capital gains have absolutely nothing to do with venture capital and the people who play in that world aren't going to pack up and leave because of a less advantageous tax advantage.

Posted by Ed Marshall | April 28, 2008 10:55 AM

John Paulson earned that money by being smarter than every NYC teacher and 99.9% of the folks on Wall Street. While Robert Rubin was getting paid $10 million per year to be oblivious at Citigroup, Paulson had figured out that mortgage-backed securities were a bubble ready to pop and he figured out a way to short them. He already pays far more than his "fair share" in taxes, but if you raise them to confiscatory levels on him, I'm sure he could find another place to live that won't.

Posted by Fred | April 28, 2008 10:57 AM

Fred, it should have been obvious to everyone that taxes were too low to cover the expenses of government, particularly when dealing with the economic burdens of prosecuting a war. The wise investor whose capital gains burden was high (which is to say, hardly any of us, since most of us are using tax-deferred investment vehicles) would have taken advantage of the artificially low tax rates over the last several years in preparation for inevitable tax increases, knowing that the current situation was unsustainable.

You got some good times. You should have enjoyed them and done well with them at a time when the country couldn't afford it. If you thought the good times would never end, you were no different than the clueless homebuilders. You should be KISSING THE FEET of the American government for giving you some "good times" that it couldn't afford and rejoice and be thankful in your good fortune. You're just an example of people who just aren't able to appreciate what they have when it's there. If you feel it would be too much of a problem for you to deal with, go to the rust belt or other parts of America that have been suffering, and you'll learn what real problems are.

For example, income taxes could be raised slightly across the board, along with a corresponding increase in the amount of tax-deductible contributions tax payers can make to IRAs, 401ks, and other retirement accounts.

IRAs and 401ks now allow individuals to contribute up to $20k/yr (5k/yr in IRAs and 15k/yr in 401ks). If everyone from the 200k/yr income level on down were saving 10% or more of their income every year, America would be doing pretty well in life. I'm not going to be against expanding the contribution limits, but I fail to see a pressing need for it.

Posted by Tyro | April 28, 2008 11:01 AM

In general, I think its more reasonable to tax capital gains than to tax wages. But what irks me about capital gains taxes is that they are largely a tax on inflation. Over the period of an investment, an asset could have doubled in nominal terms but stayed flat in real terms. Yet, when you go to pay taxes, you are taxed on the nominal value, even though, in real terms, the investment didn't make any money.

What I'd like to see is a higher capital gains tax overall, but with the ability to deduct the inflationary component of the gains - thus, real returns would be taxed, and not nominal returns.

Posted by Spike | April 28, 2008 11:09 AM

Ed Marshall, venture capital isn't the only capital that funds R&D, innovation, and job creation. Capital raised in IPOs and secondary offerings in the stock market does so too. By raising capital gains taxes, you ultimately raise the cost of that capital. You know what usually happens when you raise the cost of something, right? You get less of it.

Posted by Fred | April 28, 2008 11:09 AM

Nice, Fred -- in addition to your unqualified assertion that CGT correlates exactly with economic expansion, you then went on to describe a tax that is both regressive and counterintuitive to that premise. The poor employ a greater percentage of their income towards consumable goods, placing the tax burden upon them. In addition, the poor often lack the means to squirrel away money for the future, and would therefore not take advantage of your tax-deductible contributions. Also, wouldn't the lowered consumption levels proferred by your plan lead to the same economic slowdown that you claim higher CGT would entail?

Posted by EpicureanQuaker | April 28, 2008 11:10 AM

Tyro,

Just for some perspective, the costs of the wars in Iraq and Afghanistan are running at about 5% of the federal budget; Medicare, Social Security, and Medicaid are running at about 45% and growing a few times faster than our trend economic growth.

"IRAs and 401ks now allow individuals to contribute up to $20k/yr (5k/yr in IRAs and 15k/yr in 401ks). If everyone from the 200k/yr income level on down were saving 10% or more of their income every year, America would be doing pretty well in life. I'm not going to be against expanding the contribution limits, but I fail to see a pressing need for it."

One problem with the incentive structure here is that since the bottom half of income earners pay so little in income taxes (the bottom 40% pay no net income taxes), income-tax deductible contributions to retirement accounts aren't as attractive to them. One solution would be to raise the employee portion of the payroll tax by 1 or 2%, and change the tax law to let employees fully deduct this increase if they contribute an equivalent amount to a retirement plan. Again, this would be a de facto consumption tax and would increase savings.

Posted by Fred | April 28, 2008 11:22 AM

Can we seriously not think of a better way to engage in progressive taxation than to tax returns to investment? Why not just raise the income tax on the highest bracket?

I'm sure the Republicans would oppose that as well but I don't like the incentives created by the capital gains tax and I'm just not sure why we use it?

Posted by Wilson | April 28, 2008 11:27 AM

Fred and his Republican friends often pull out this trope that if we raise the capital gains tax it will discourage investment in the stock market. Sounds scary, right? Here's the thing: during the Clinton years, capital gains were taxed at a "confiscatory" rate of 28% and we all no how that turned out. People shied away from the stock market and parked all their money in FDIC insured savings accounts and CDs.

Back in the real world, anybody with half a brain knows that the best way to get a competitive long term rate of return is to have exposure to equities, and raising cap gains taxes back to their Clinton era levels will do nothing to discourage such investment.

Here's a handy formula to determine how much tax-free investment return you need to achieve the investment return of your taxable investment:

Tax equivalent yield= Tax-free yield/(1- tax rate)

So assuming cap gains taxes are raised to 28%, that means a tax free investment (i.e. a municipal bond) would have to yield 7.2% to equal the average stock market return of 10% (over the last 80 years) (10 = Tax-free/ (1-.28))

Also, what Atrios and Matt said, the vast majority of investors hold most of their significant assets in tax-deferred vehicles such as 401k's or IRAs.

Posted by drjimcooper | April 28, 2008 11:28 AM

"It's true that a married couple composed of an NYPD detective who pulls lots of overtime and a NYC public high school teacher with a lot of seniority can have a joint income of over $200,000 a year"

This is just sad. We resemble your hypothetical couple, except we have relatively more prestigious jobs -- my wife is a college professor, and I'm an assistant AG for a medium-sized state. And we make a LOT less than $200k.

Posted by Joe | April 28, 2008 11:31 AM

You'll note that the Democratic Congress has Cheney-esque approval ratings; is this because people aren't paying high enough taxes?

The Democrats lost the country a generation ago in part because they became wildly out of touch with the amount of taxes the American middle class was willing to pay.

A generation later wages are stagnant, the cost of food and energy are up, affordable homes are further away from good jobs, the cost of higher education is way up and the middle class tax burden is roughly what it was when Carter was in office. Making the middle class pay higher taxes is probably not the best solution to most of these problems.

Posted by Linus | April 28, 2008 11:35 AM

Medicare, Social Security, and Medicaid are running at about 45% and growing a few times faster than our trend economic growth.

Ah. I see your mistake. Let me explain to you how the budget works. These programs are accounted for by payroll taxes. In fact, income and capital gains taxes are held artificially low because the expenses of government are being covered by tax revenue to cover medicare and social security. This is actually a serious issue that I think you should look into.

Once again, many of us have been benefiting from taxes that are already artificially low, so it's pretty rich to start whining that increases can't be handled. You took advantage of some good times. in which taxes were held artificially low to cover the costs of government (particularly when the AMT is going to be eliminated, sooner or later). If you didn't make economic plans ahead of time that would allow you to absorb that inevitable increase, it is because you were stupid (as we can see, you didn't know that your cap gains and income taxes were kept low by being "subsidized" by payroll tax surpluses). You should have been thankful, but instead I hear a lot of resentment from you. I don't think this is valuable, and I'm not sure this is a very good attitude to have towards a government that gave you so much and provided you with a war that gave you so much amusement and entertainment value that it allowed you to purchase on credit.

What we can see here is how much our attitudes towards taxation, particularly from conservatives, is driven by an extreme, relentless ignorance of budget issues. This is doing a lot of damage to our public discourse, and leaves people like Fred vulnerable to the propaganda from demagogues who have obviously mislead him.

One solution would be to raise the employee portion of the payroll tax by 1 or 2%, and change the tax law to let employees fully deduct this increase if they contribute an equivalent amount to a retirement plan. Again, this would be a de facto consumption tax and would increase savings.

That particular point is actually not such a bad idea, but that's separate from the idea of increasing 401k/IRA limits, but that's separate from the capital gains issue.

Posted by Tyro | April 28, 2008 11:36 AM

Fred's argument is that the richer you are, the lower your taxes should be, because unlike real Americans who actually like living and raising their families in the United States, rich traitorous assholes will move to the Cayman Islands if they're asked to contribute to the cost of defending their country. Hey, Fred, if you don't like it here, you can leave. Just drop your flag pin on the table by the door on your way out.

Posted by Bloix | April 28, 2008 11:37 AM

"Nice, Fred -- in addition to your unqualified assertion that CGT correlates exactly with economic expansion"

When did I assert an exact correlation with economic expansion?

"In addition, the poor often lack the means to squirrel away money for the future, and would therefore not take advantage of your tax-deductible contributions."

See my suggestion to make the contributions deductible against a slightly-increased payroll tax.

"Also, wouldn't the lowered consumption levels proferred by your plan lead to the same economic slowdown"

Yes, raising taxes slightly on consumption would have a slight negative effect on economic growth, but this could be offset by the positive effect of the increase in savings. The increased revenues from the de facto consumption tax could also be used offset cuts in other tax rates that could increase job creation, e.g., a cut in corporate income tax rate -- maybe even down to level of Sweden's. We have reached a point of diminishing returns in relying on consumers spending more than they earn to fuel our economic growth.

Posted by Fred | April 28, 2008 11:37 AM

Re Matthew's comment "But beyond that, a political movement that's interested in providing new public services requires revenue to pay for those services. To get the revenue, there have to be increases in the overall level of taxation. "
-----------------
1) Sigh. I appreciate your efforts, Matthew. But sometimes you are a moron. An idiot. Sorry.

2) The ONLY reason progressives should give for raising taxes is to "Pay down the huge $10 TRILLION dollar Reagan/Bush Debt". "To reduce the roughly $400 BILLION of YOUR taxes that go out every year just to pay WEALTHY INVESTORS the INTEREST on that HUGE $10 TRILLION REAGAN/BUSH Debt"

Repeat the above 10 times. That's the new political mantra.

3) Part 2 of the Mantra: "The superrich put Reagan, George H and George W into office --now they get to pay for the consequences of their actions. They get to pay off the $10 Trillion in debt approved under the PERSONAL SIGNATURES of those REPUBLICAN presidents."

4) Part 3 of the Mantra: "Fred is a moronic asshole. Bush's tax cuts did NOT spur investment in the USA -- the superrich sent most of the money to create Jobs in CHINA.

Republicans in the pocket of defense contractors are now claiming that China is an emerging threat. Well, it is their diversion of US capital INTO China that FED THE GROWTH of that Threat. So THEIR TAXES will be raised to deal with the Threat they have created."

5) If , perchance, the above actions happen to free up some money in the US Budget for progressive programs, then that is mere happenstance.

6) I am sick and tired of the Republicans and their superrich patrons shitting on this country and then claiming our taxes should go to pay them for the delivery of fertilizer.

Posted by Don Williams | April 28, 2008 11:39 AM

The Democrats lost the country a generation ago in part because they became wildly out of touch with the amount of taxes the American middle class was willing to pay.

Linus, as we can see from both your and Fred's contributions, as well as Sen. McCain's statements, they are extremely uninformed about the state of the middle class and how they make their money and which taxes they pay. I'm not sure this is the crowd we should be taking policy advice from. We've provided facts, you haven't and have implicitly endorsed the wide-eyed cluelessness and ignorance from Senator McCain. It is clear that republicans, unfortunately, cannot be trusted with an understanding of tax and budget policy, and unless you have some actually *informed* contributions, I suggest you read a little more about what we're talking about, and you might learn something.

Posted by Tyro | April 28, 2008 11:41 AM

Hey, Fred, if you don't like it here, you can leave. Just drop your flag pin on the table by the door on your way out.

That's what's so stunning-- Fred's resentful thanklessness about the low tax regimes he was privileged to enjoy while payroll taxes and deficit spending were bankrolling a group of policy preferences (eg, tax cuts and the war) that he demanded. Instead of being thankful for his privileges, we hear nothing but anger and resentment, without even an acknowledgment of the hard lives a lot of people lived in many destitute parts of the country. Is he not aware that he was able to live a good life and pay ultra-low taxes while so many in America were suffering and facing economic stagnation in so many parts of the country? I really find his lack of understanding of how good he had it and how privileged he was to benefit from a government willing to give him a tax holiday while not being able to pay its own bills to be fairly unappreciative of his fellow Americans. How was this person raised, anyway?

Posted by Tyro | April 28, 2008 11:45 AM

Could Fred explain to us the difference between raising someone's taxes versus dumping $5 TRILLION in debt on people --so that the government has to take $200 Billion in taxes EVERY YEAR just to pay the interest on that debt?

Can Fred explain why it is that any attempts to HELP the people of this country is "starving the capital markets and putting the economy into a recession " -- but pissing $1 Trillion down an Iraqi rathole is good government?

Posted by Don Williams | April 28, 2008 11:49 AM

Economics-ignorant questions:

Don't tax revenues act like capital when spent on things like infrastucture and R&D?

Doesn't the deductibility of capital losses also contribute to risk-taking? If we only taxed income or consumption and ignored capital gains AND losses, wouldn't that lead to less risky investments?

Posted by apm | April 28, 2008 11:51 AM

"Here's the thing: during the Clinton years, capital gains were taxed at a "confiscatory" rate of 28% and we all no how that turned out."

Do you even remember the Clinton years? Because if you did, you'd remember that Clinton cut the capital gains tax from 28% to 20%.

"Ah. I see your mistake. Let me explain to you how the budget works. These programs are accounted for by payroll taxes."

Tyro, do some homework on this. The payroll tax doesn't fully fund Medicare and Medicaid; only about half of the cost of Medicare is covered by the payroll tax. The Social Security portion does currently raise more in taxes than the current cost of Social Security benefits, but that surplus is effectively loaned to and immediately spent by the federal government (partly, to cover the cost of Medicare). If you want to raise the payroll tax to the level where it would fully fund entitlement spending, you'd have to raise it higher than I have proposed. Remember that the Medicare portion of the payroll tax is already uncapped.

Posted by Fred | April 28, 2008 11:52 AM

I can't get over the idea that the goal is to punish the successful in order to reward the unsuccessful.

Posted by jmo | April 28, 2008 11:54 AM

Can't see how raising capital gains really hurts investment too much. If you play a buy and hold strategy capital gains don't show up very often. Furthermore, are we to believe that our economy was substantially benefited by Paulson's hedge play? Yeah, these guys are smarter and contribute more. But guess what- they're not going anywhere. Their gains our also fundamentally dependent on the health of our economy, our financial system and the american public. Maybe they should give a little back to the people that enabled them to generate so much wealth. The problem is Republicans have it all wrong. Wealth is trickle up not trickle down. Anyhow, the greatest threat to our economic success is the loss of seignorage that we'll get if we don't shore up our national finances.

Posted by mpowell | April 28, 2008 11:57 AM

John Paulson earned that money by being smarter than every NYC teacher and 99.9% of the folks on Wall Street.

You see, rich people are rich because they're "smart," and the rest of us, being stupid, can go suck it.

Posted by James Gary | April 28, 2008 11:59 AM

Fred's resentful thanklessness about the low tax regimes he was privileged to enjoy while payroll taxes and deficit spending were bankrolling a group of policy preferences (eg, tax cuts and the war) that he demanded. Instead of being thankful for his privileges, we hear nothing but anger and resentment, without even an acknowledgment of the hard lives a lot of people lived in many destitute parts of the country. Is he not aware that he was able to live a good life and pay ultra-low taxes while so many in America were suffering and facing economic stagnation in so many parts of the country?

This is all well and good, but has nothing to do with tax policy. The simple basic fact is if you tax something, you create a disincentive towards it. Economists have demonstrated that capital investment is a very harmful thing to disincentivize, especially in a world with global capital markets. If you want to tax the rich extra for whatever emotional reasons you wish to cite, at least do it in a less destructive manner - through estate taxes, high marginal income tax rates, luxury goods taxes, whatever.

Posted by right | April 28, 2008 11:59 AM

"Hey, Fred, if you don't like it here, you can leave. Just drop your flag pin on the table by the door on your way out."

Peevishly threatening to leave the country if the political environment changes is normally the province of Hollywood liberals.

"Instead of being thankful for his privileges, we hear nothing but anger and resentment"

If you hear any "anger and resentment", it's your own. I have no idea why you have imputed such emotions to my comments here, because I wasn't feeling angry or resentful at all as I typed them. Further, I'd suggest that if you liberals can force yourselves to think about taxes objectively rather than emotionally, you'd probably come up with better policy ideas.

Posted by Fred | April 28, 2008 12:04 PM

The political problem with raising capital gains and dividend taxes is that retirees live off of capital gains and dividend taxes. Thus, everyone who even plans on retiring will be so afraid of "I made retirement investments assuming the current capital gains and dividend tax rates, and now those Dems. want to raise my taxes -- I'll be broke!" that they'll vote GOP because they don't want what money they've managed to save to ensure their golden years are at least copper years to go to icky people who do icky things.

Any Dem. plan involving raising capital gains and/or dividend taxes must be very clearly presented so that, even over the media noise machine, it is clear to the future alter-kockers of America that they won't get screwed by the tax increases. Already, many boomers believe that there is some windfall tax proposal in Congress that'll involve the capital gains of their retirement accounts being taxed at some exhorbitant rate.

AFAIK, income is income and should generally be treated as such for tax purposes. If you make (above exemptions/deductions) $100K, it shouldn't matter whether you earned that money by the sweat of your brow or by sitting on your trust fund (or as GOoPers would put it, "being successful", as in "capital gains taxes punish the successful") -- the income is income.

However, in order to not have a bunch of soon-to-be seniors who thought they had saved enough money get hit with taxes they didn't anticipate and form another bonus army (this time not asking for government services but fueling another Reagan-esque "tax rebellion" that is the last thing our country needs), we need to jiggle exemptions so that way middle income people won't be hit too hard by capital gains tax increases and the like.

Posted by DAS | April 28, 2008 12:04 PM

Most of the concerns regarding this is to have a location based standard deduction. Just map the locality pay adjustment for federal civilian employee to standard deduction, and the problem is more or less solved.

Posted by kanchou | April 28, 2008 12:06 PM

"But beyond that, a political movement that's interested in providing new public services requires revenue to pay for those services. To get the revenue, there have to be increases in the overall level of taxation."

Actually, to quote Darth Cheney, Reagan showed us that deficits don't matter.

While I don't entirely agree with Dick, I think there is a lesson there for Democrats. Republicans always say that all Democratic programs must be fully funded or the gates of hell will crack open and Satan will devour all of our children. Matt seems to agree.

However, wars, a bloated Department of Defense, and other Republican favorites can happily be funded indefinitely through deficit spending.

The Republicans have shown us the way, if only we will follow. There is no need at all to find revenue to pay for new services. Just charge it. New taxes can always come years later in the form of an eat-your-vegetables deficit reduction package. But to concede that all future liberal programs must be revenue neutral while all past conservative programs can be billions in debt for all eternity is to surrender before the battle even begins.

(And, by the way, getting out of Iraq will free up about $150 billion for new social spending. That's enough for national health care AND an environmental Apollo Program.)

Posted by Rob Mac | April 28, 2008 12:08 PM

Linus:
So how do you suggest we pay down the national debt? Or do you think the party can go on forever? Also, do you think the middle class really saw any significant difference in their taxes? I think you know the answer to that. It's another propaganda piece put out by the Rethuglicans. Grover Norquist and his band of thugs.

Posted by Joe Klein's conscience | April 28, 2008 12:08 PM

So how do you suggest we pay down the national debt? Or do you think the party can go on forever?

The debt can certainly last forever, as long as it remains a reasonably small proportion of GDP. Right now interest on the debt is only 9% of federal outlays, which is more than manageable. Most businesses and individuals have debt levels far exceeding that.

Posted by right | April 28, 2008 12:13 PM

Re jmo's comment "I can't get over the idea that the goal is to punish the successful in order to reward the unsuccessful."
-----------
1) Are we talking about the Federal Reserve's bailout of the investment banks and hedge funds with taxpayer dollars?

2)Or Are we perhaps talking about Bush/Cheney's multi-Trillion dollar subsidy to the oil industry -- the acquistion and protection of oil company assets in the Middle East?

3) Or maybe we're talking about seeing defense contractors turn defense programs into billion dollar failures --only to be rewarded with $Billions more to fix the trainwrecks they caused?

4) Maybe jmo could tell us about the "free market".

Maybe he could explain how deliberations in the Congressional Republican Caucus differ in any way from the old Soviet Union's Politburo dividing up the spoils.

Posted by Don Williams | April 28, 2008 12:14 PM

This is all well and good, but has nothing to do with tax policy. The simple basic fact is if you tax something, you create a disincentive towards it. Economists have demonstrated that capital investment is a very harmful thing to disincentivize, especially in a world with global capital markets.

Can you provide evidence of this? Because there are certainly studies that have found capital gains taxes have a negligble effect on investment:

Research Associate Steven M. Fazzari and Benjamin Herzon assess the effect of a capital gains tax cut on firms' decisions to undertake new investment projects and the possible effect of such projects on economic growth and employment. Their analysis takes into account such factors as projects' degree of uncertainty, investors' degree of risk aversion, whether capital gains losses are deductible against capital gains income, whether the market value of an investment project is affected by the imposition of capital gains taxes, and whether the project is financed by internal or external means. Fazzari and Herzon find that there is little theoretical or empirical basis for the view that lowering the capital gains tax rate would have a substantial effect on economic growth or level of economic activity. They estimate that the current proposal to lower the highest capital gains tax rate from 28.0 percent to 19.8 percent would have a long-term effect on the level of output no greater than the impact of roughly two months of normal economic growth, and it would take years to realize even this small benefit. Indexing the rate to inflation would have a somewhat larger, but still small, effect. Fazzari and Herzon conclude that capital gains taxes have a negligible influence on investment decisions and dispute the claim that a lower capital gains tax rate would have large beneficial effects on output, growth, or entrepreneurial activity in the U.S. economy.

Posted by Peter H | April 28, 2008 12:16 PM

Fred,

From 1992-1996 the cap gains rate was 28%. You are correct that it was cut to 20% but the main point still stands: investors looking for the highest long term rates of return will still choose equities even when gains are taxed at 28% (unless they can get a tax-free investment return of 7.2%)
source: http://www.ctj.org/pdf/regcg.pdf

Furthermore, the cap gains tax rate does not affect the vast majority of americans, who tend to have most of their investable assets in tax-deferred retirement accounts.

As to jmo's "point" I can't get over the idea that the goal is to punish the successful in order to reward the unsuccessful.

Why is it punishing the successful to tax capital at a similar rate as the labor that creates it? There can be no capital to invest if people aren't working. I would also wager that most of the ultra wealthy who are living off of investment income and thus being most acutely affected by the cap gains and dividend tax rates were/are beneficiaries of vast family wealth that they did very little to create (see Hilton, Paris and any of the Walton family not named Sam)

Posted by drjimcooper | April 28, 2008 12:20 PM

Don,

I have the same problem with the gov't bailing out banks and hedge funds as I do with the gov't bailing out some high school drop out who can't get his s**t together.

Posted by jmo | April 28, 2008 12:21 PM

I have wondered if we should have a progressive capital gains tax. Any reason why it would be hard to implement? I know the flat taxers think the problem with taxes is the progessive rates, but that's really not what makes figuring your taxes hard (it's deduction, stupid), though it can make tax strategy a little harder. But it would be plenty easy to have a table for capital gains. Or you could do 2/3(capital gains) + income = taxable income. Combined with a progressive tax ladder we could avoid increasing the rate for those seniors.

Posted by mpowell | April 28, 2008 12:21 PM

Liberals often pride themselves on their international perspective -- why not apply this to economic issues such as taxes? Why not look at the different tax policies of other first world countries with strong economies and see what has worked? If you do, I think you'll find some common elements: generally higher personal income and consumption taxes and generally lower corporate income taxes and capital gains taxes.

Another reason to look at what successful first world countries are doing is so we can structure policies that increase America's attractiveness to business investment and job creation relative to our competitors. Why wouldn't you want to encourage more entrepreneurs and business executives in Europe, Asia and elsewhere to invest more capital and create more jobs in the U.S.?

Posted by Fred | April 28, 2008 12:23 PM

James Gary restated Fred's "rich are smart" comment as:

"You see, rich people are rich because they're "smart," and the rest of us, being stupid, can go suck it.

------------
50 Million middle-class Republicans were too stupid to realize that Bush paid for his $2 Trillion tax cut for the superrich by stealing the money out of middle-class Republicans' Social Security/Medicare accounts.

Rush Limbaugh, Bill O'Reilly, Ann Coulter and Fox News are still making money feeding bullshit to morons.

Fred's got a point.

We are a nation of idiots.

Posted by Don Williams | April 28, 2008 12:26 PM

Don,

Also, the Republicans seem to tend toward bailing out the big guys while the progressives want to bail out the little guys.

I'd prefer that we don't use taxpayer money to bail anyone out.

You f**k up you're on your own.

Posted by Jmo | April 28, 2008 12:29 PM

For that matter, why not encourage more foreign investors (individual and institutional) to invest here? We aren't the only game going anymore.

Posted by Fred | April 28, 2008 12:33 PM

I don't disagree with Don Williams' point about middle-class Americans being gulled by GOP fiscal policy, but my intent was to highlight the lordly condescension in Fred's implication that teachers don't work on Wall Street because they're not "smart."

Posted by James Gary | April 28, 2008 12:42 PM

You get taxed on your net income, after deductions. I doubt that there are any cop + teacher couples in NY with a net income of over $200,000. Also, these couples would really apreciate reform of the alternative minimum tax.

Posted by Jose Padilla | April 28, 2008 12:44 PM

James Gary,

"You see, rich people are rich because they're "smart," and the rest of us, being stupid, can go suck it."

In my post that prompted this comment by you, I called one rich guy, John Paulson, "smart". In the next sentence, I called another rich guy, Robert Rubin, "oblivious". Did you miss that second sentence?

Not all rich people are rich because they are smart (there are also those who are lucky, heirs, etc.), but most are. John Paulson is one of the smart ones.

Posted by Fred | April 28, 2008 12:46 PM

Re Jmo's proposal "Also, the Republicans seem to tend toward bailing out the big guys while the progressives want to bail out the little guys.

I'd prefer that we don't use taxpayer money to bail anyone out.

You f**k up you're on your own."
------------
1) I myself think we should scrape the entire Criminal Justice system. It's really just a big Corporate Welfare program for the Rich.

After all, Most of us don't have that much to protect from thieves -- and those who do are socially responsible enough to hide the money under the mattress.

2) We should stop taxpayer-support of the police and courts. If some poor bastard shoots some rich fucker and takes his money, well--that's just the Darwinian free market in operation.

Posted by Don Williams | April 28, 2008 12:48 PM

1)Come to think of it, Jmo, we should scrape the Department of Defense as well --for the same reason. No one's going to cross a vast ocean and invade a nation of 300 million people with 200 million firearms. If they do -- well, they'll go after the assets of Dick Cheney's superrich buddies and that doesn't really hurt my head.

2) After all, you can argue that the common US citizen might have been much BETTER OFF if we had LOST the Cold War to the Commies. We could have saved about $5 Trillion on defense.

Not even the Soviet Commissars would have been as predatory as the IRS will be in collecting on Bush's IOUS. They would probably have been more than happy if we simply gave them Rumsfeld's annual budget as tribute.

3) And , in exchange, they would have handled the Trotskyite Neocons in the same way they handled ..uh.. Trotsky. In retrospect, that might not have been a bad deal.

4) Plus, Not even the Commies would have been the type of sick bastards who set up a "Social Security" program, have the Proletariet pay into "their accounts" for decades, -- and then stole every cent in those accounts.

Posted by Don Williams | April 28, 2008 12:56 PM

Peter H.,

"Can you provide evidence of this? Because there are certainly studies that have found capital gains taxes have a negligble effect on investment"

The study you quoted from was apparently a prediction written before Clinton cut the capital gains tax from 28% to 20%. Was there a follow-up study evaluating how accurate that prediction was?

James Gary,

"my intent was to highlight the lordly condescension in Fred's implication that teachers don't work on Wall Street because they're not "smart.""

I didn't say that NYC teachers weren't "smart" (I'm sure some are, particularly some Teach for America recruits) -- just that John Paulson was smarter. I also wrote that he was smarter than 99.9% of Wall Streeters, but you ignored that part of the sentence. Your apparent sense of self-righteous indignation seems to impede your reading comprehension.

Posted by Fred | April 28, 2008 12:59 PM

Don,

You have two 32 yo guys. Both went to the same schools and come from similar socioeconomic backgrounds. One makes 65k the other makes 225k.

Why do you think that "income gap" exists?

Posted by Jmo | April 28, 2008 1:00 PM

Fred said... Just for some perspective, the costs of the wars in Iraq and Afghanistan are running at about 5% of the federal budget; Medicare, Social Security, and Medicaid are running at about 45% and growing a few times faster than our trend economic growth.

Nice numbers Fred. Here's some homework for you. Take out the trust fund surpluses from the general budget and tell me how much debt GW's policies have racked up. Extra credit for doing the same with Reagan/Bush I.

I'll give you a hint. The tax policies you are defending are set to hit us with an estimated $400 billion deficit this year, BUT that's only true if you "borrow" trust fund surpluses and call it income. If you pull that out, it's over $700 billion.

We're $700 billion short of a true balanced budget, and you want a tax cut? Please buy a calculator before expounding further.

Posted by LFC | April 28, 2008 1:01 PM

Capital raised in IPOs and secondary offerings in the stock market does so too. By raising capital gains taxes, you ultimately raise the cost of that capital.

You could keep rates low on bond issues, IPO, secondary offerings, and various capital raising items and still increase the tax on gains from secondary market trading.

Posted by daveNYC | April 28, 2008 1:07 PM

You have two 32 yo guys. Both went to the same schools and come from similar socioeconomic backgrounds. One makes 65k the other makes 225k.
Why do you think that "income gap" exists? - Jmo

Wow! This hits close to home. I'm almost 32, and I hope to start a job next year wherein I'll be making about 65K. I'm sure some people who went to my high school (even if they went to a different college) are making 225K/year.

Actually, not to brag but the fact of the matter is that I bet if you were to test me and my hypothetical classmate making 225K/year using Dinesh D'Souza's favorite IQ test, I'd score a lot higher -- you generally don't get to be an Assistant Prof. (the job I'm trying to get) by being stupid ... but you can make a whole lot more money on jobs requiring less brain power.

So for the last time, intelligence =/= financial success.

Posted by DAS | April 28, 2008 1:10 PM

He already pays far more than his "fair share" in taxes, but if you raise them to confiscatory levels on him, I'm sure he could find another place to live that won't.

Alternatively, we could hang him in Central Park pour encourager les autres.

Old Fart Fred whines a lot about 'confiscatory', but taxing the ultra-wealthy is really a feather's touch compared to more traditional ways of dealing with them. Of course, OFF is one of those guys who fantasises about advantageously-leveraged hedge fund managers because there are too many non-whites in sports.

Nice troll, though: by throwing in the most egregious example, OFF completely jacks the thread.

Posted by pseudonymous in nc | April 28, 2008 1:17 PM

DAS,

Exactly, some people prefer to get paid in cash other prefer to get paid in prestige. I'm sure you'd agree that a professor has a much more prestigious job than a headhunter. I know several recruiters who make upwards of 350k a year.

Just because you wish to take your compensation in the form of social prestige - why does that mean your obligation to support the government programs you advocate should be less?

Posted by jmo | April 28, 2008 1:22 PM

Re Jmo's comment "Don,

You have two 32 yo guys. Both went to the same schools and come from similar socioeconomic backgrounds. One makes 65k the other makes 225k.

Why do you think that "income gap" exists?"
---------------
1) Well, the 65k guy , with a deep love for his country, made the military a career. So by Republican standards, he's a moron.

2) The 225k guy, on the other hand, was an alcoholic, an idiot, and a poor businessman on the verge of bankruptcy who was rescued by some superrich guys on the lookout for a pliable puppet.

In exchange for the 225K guy's soul, they made him President of the United States. A President who will tell any lie and commit any act to benefit thost superrich patrons -- because the 225K guy breaks out in a cold sweat whenever he thinks about being left on his own.

3) Steal $2 Trillion from Social Security/Medicare and give it to the richest 2% of the population? No problem.

Allow Sept 11 to happen and then stand up before the surviving families of 3000 dead Americans and lie to those families about who/what provoked the attack? No problem.

Scrap the Bill of Rights? No problem.

Send 4000 men to their deaths on a lie --in order to grab some oil deposits? No Problem.

Posted by Don Williams | April 28, 2008 1:23 PM

The argument about who pays the tax is irrelevant. Republicans are going to lose.

The capital gains tax is a direct tax on growth, therefore it hurts people who might be employed if it was lower. In this world, the only way for poor people to be employed is to get the rich to risk some of their money on employing them.

Many elite Democrats however would rather see $50 tax collection on a $100 economy than a $40 tax collection on a $200 economy. But the poor person does better in the second economy.

Posted by wellbasically | April 28, 2008 1:33 PM

Fred said... The payroll tax doesn't fully fund Medicare and Medicaid; only about half of the cost of Medicare is covered by the payroll tax. The Social Security portion does currently raise more in taxes than the current cost of Social Security benefits, but that surplus is effectively loaned to and immediately spent by the federal government (partly, to cover the cost of Medicare).

You've undercut your argument for lower tax rates with this one. Since the surplus is being loaned to the gov't, it means that we need to balance our budget. That means tax hikes, spending cuts, or (most reasonably) both.

BTW, the Medicare trust fund is still in the black, so what's the problem? Oh, yeah. The Tinkle Down Economics gurus borrowed all that money and now we're looking at having to pay it back.

Posted by LFC | April 28, 2008 1:41 PM

Don Williams,

1) (Since you like numbered points) How does one "steal" from the Social Security trust fund?

Pseudomonas,

"Alternatively, we could hang him in Central Park pour encourager les autres."

What colorful sadistic ideation -- if only you could have been in the NKVD in another life. Would you hang Robert Rubin next to Paulson? Or in your moral universe, does Paulson deserve death for making money by being right, while Rubin deserves absolution for making money by being oblivious, while shareholders lost over a hundred billion dollars?

Of course, if the rich start getting hanged in Central Park, invariably, the non-rich would get hanged too. Leftist orgies of violence, like leftist tax policies, often end up hitting more than their initially-intended targets.

FWIW Pseudo, I didn't bring up the example of John Paulson -- Bloix did.

Posted by Fred | April 28, 2008 1:42 PM

Many elite Democrats however would rather see $50 tax collection on a $100 economy than a $40 tax collection on a $200 economy. But the poor person does better in the second economy. - wellbasically

Actually we do not know in which economy the poor person does better as we do not know the wealth distribution in either one.

Also, you make an argument that the capital gains tax is a tax on growth and then proceed to ignore growth in your statement about economic size. It seems to me that an economy that has a more even wealth distribution is liable to have a broader consumer base and hence would tend to grow more robustly. Moreover, since the equilibrium income/wealth distribution is highly uneven (given by Pareto, IIRC), by making the distributions more even, e.g., via tax law, you stir the economic pot up and prevent it from relaxing toward equilibrium (e.g. equilibrium would include not growing).

A $200 economy might be "better" at the moment than a $100 economy, but if by having the extra tax money, you are able to have a broader consumer base, that $200 economy might stay a $200 economy (and those trying to get capital gains can invest all they want -- if no-one is buying product, their investments go for naught) whilst the $100 economy becomes a $300 economy because its pot has been stirred via government redistribution and investments (which are more efficient as you don't have to extract profits from them -- all the money is put to work).

Indeed, historically (although correlation is hardly causation) our period of greatest sustained and steady growth felt as such by the average American was during the period when the economy was most effected by New Deal stewardship and Big Government spending. And during this period, with the exception of Eisenhower (and guess who, last I heard, Susan Eisenhower is supporting? FWIW ...), the Presidents were Democratic and Democrats tended to dominate Congress ... hmmm ...

Posted by DAS | April 28, 2008 1:51 PM

Many elite Democrats however would rather see $50 tax collection on a $100 economy than a $40 tax collection on a $200 economy.

Fred is making the same old tired argument. Here's a graph of debt vs. GDP. What does it show? It shows that that great $200 economy was really a $100 economy plus $100 of debt injected into the economy.

The GOP is the party of debt. It happened under St. Ronnie, George I, and George II. Clinton is the only one who actually started to get a grip on things.

McCain now wants the same old disastrous policies that have saddled our country with trillions in debt. His "savings" are ethereal and non-specific, but his revenue cuts are clear as a bell. That's typical Republican for the past 28 years.

Posted by LFC | April 28, 2008 2:11 PM

Elite Democrats would rather make the decisions about where to spend or invest the money, that's why they can only argue about the size of tax revenues and ignore the private economy. Elite Democrats would rather run the private economy but don't want to go to the trouble of making stuff people will freely buy or invest in.

During the times you cited Democrats were the party of growth, the Republicans were the party of balanced budgets and high taxes. That's not the case now, Dems can't get away with it.

I appreciate you taking the time to craft the rest of your response, but it's hooey. The way we extend capital to poor people in the USA is to allow rich people to invest in the businesses that employ poor people. The capital gains tax makes it harder to get a high return OUT of those businesses and therefore makes it less likely for people to put their money IN.

Posted by wellbasically | April 28, 2008 2:21 PM

During the times you cited Democrats were the party of growth, the Republicans were the party of balanced budgets and high taxes.

And what time would that be? Certainly at no time since 1980. The Republican may have SAID they wanted balanced budgets, but they never did anything to perform.

The way we extend capital to poor people in the USA is to allow rich people to invest in the businesses that employ poor people.

More Tinkle Down Economics. Yours is a classic case of "if some is good, more must be better". It would be destructive to have a 50% capital gains rate, but that doesn't mean that a 15% rate is better than a 20% rate. There's a logical bottom, and we've passed it.

Posted by LFC | April 28, 2008 2:28 PM

LFC,

"You've undercut your argument for lower tax rates with this one."

I haven't made an argument for lowering tax rates across the board -- I haven't even made an argument for lowering the capital gains tax, just for not raising it.

Once the economy recovers, we will need to raise tax revenues and rein-in the growth of entitlement spending. What I have been arguing (read my previous comments) is that the mix of taxes we have should be one that encourages investment and job creation in America. Such a mix of investments would not include higher capital gains taxes. It might, as I suggested above, combine higher personal income taxes and a de facto consumption tax with a lower corporate income tax.

"Fred is making the same old tired argument."

That was Wellbasically's argument, not mine.

Posted by Fred | April 28, 2008 2:36 PM

A. Parties don't perform on balanced budgets generally because it doesn't win. It would involve raising taxes and slowing the economy to an extent that people are better off with faster growth and a deficit. Hoover raised the top tax rate to 90% and he lost to FDR.

B. No I would be in favor of raising the top income tax rate, we have had faster growth with a higher top rate.

What you are proposing by raising investment taxes is a return to the economic outlook of 2003 which was 40% smaller. Do you really want the economy to slow down again? That's what Obama and Hillary are running on.

They want the money for social spending. Maybe the spending would improve people's lives beyond the destruction higher taxes would do. Maybe not. I haven't heard that argued though.

Posted by wellbasically | April 28, 2008 2:44 PM

But it's absolutely crippling to any effort to outline policy with any level of ambition to concede the idea that any tax that places any burden whatsoever on the non-rich is therefore unacceptable.

What?

Is it just me?

Posted by Cakesniffer | April 28, 2008 2:50 PM

What you are proposing by raising investment taxes is a return to the economic outlook of 2003 which was 40% smaller.

I appreciate the effort you took in crafting your response, but it was a waste since you seem to just be making numbers up.

Posted by Rambuncle | April 28, 2008 2:55 PM

"You have two 32 yo guys. Both went to the same schools and come from similar socioeconomic backgrounds. One makes 65k the other makes 225k.

Why do you think that 'income gap' exists?"

Well, one reason could be that the one making $65K works in a relatively small town--and owns a 20 acre property, supports his wife, three children and the family dog, Shaggy, while working abour 42 hours a week. His friend, who ended up in Washington, DC, clears $225K a year, lives in 600 square foot condo in an "up and coming" area, works 72 hours a week, and is trying desperately to get a date with his 22-yo secretary (no shame in his game).

Aside from the goofy characterization of lifestyle choices, I just wanted to point out one of the glaring omissions of all this talk about incomes, $200K is a relative figure--$200K is one number in Poughkeepsie, another in Seattle, and yet another in NYC. It's a political necessity to conceptualize the numbers thusly, but surely we could come up with a better-targeted tax policy by bringing zip codes into the mix.

Posted by VasyaDC | April 28, 2008 2:59 PM

Vasya,

That's part of it. The other part, does the guy who takes the easy route have less of an obligation to support society than the guy who decides he'd rather work harder and make more?

Just because someone wants to enjoy their hobbies and leisure time shouldn't mean they get to avoid their obligations to society.

Posted by jmo | April 28, 2008 3:30 PM

A lot of poor people work 72 hours a week. The amount of money you make depends on the capital that goes into the thing which you produce or sell. Your personal time, as a form of human capital, is only one form. You may have sacrificed time in the form of schooling.

A 100% tax on capital gains is the equivalent of forbidding parents to educate their children.

In general the Democrats would like to redirect capital investment according to their political preferences. For instance here in Massachusetts we have tax breaks for solar energy companies etc. But besides being opposed to the market system of finding productive investment, this also leads to massive corruption ala Tony Rezko.

Posted by wellbasically | April 28, 2008 3:45 PM

wellbasically, it is not only Democrats who direct tax breaks toward industries they favor. I doubt that the tax breaks for solar energy in Mass come any where near the impact on the market of, say, subsidies to industrial agriculture, timber, mining, and oil, to name just a few industries out there getting government favors. But you are right that this sort of thing is easily corrupted. However, government contracting is far more a ripe target for corruption because it is much more hidden from scrutiny.

And VasyaDC, $200K a year is a ton of money no matter where you live. I don't think your idea of tax breaks for wealthy Manhattan loft-dwellers has much of a future, but hey, why not float it with the McCain campaign?

Posted by Rob Mac | April 28, 2008 4:02 PM

"not only Democrats who direct tax breaks toward industries they favor"

amen

Posted by wellbasically | April 28, 2008 4:12 PM

You guys have weird ideas about money, wealth and tax policy.

1) the rich will ALWAYS find a way to avoid paying taxes, tax rate increases will be avoided by finding loopholes!!! The additional pot of money "found" elsewhere will be far less than expected in a steady state model. Make the system bone simple and you will collect more of the expected revenue. Complexity = opportunity.
2) taxing luxury items is a job killer -- for example, the luxury tax on boats raised "not much" and killed off the boat building industry in the US -- losers include the guys who used to have jobs laying fiberglass forms. The rich bought their boats elsewhere (overseas) and did sale-leasebacks or other tax dodge.
3) cap gains/income/payroll/dividend tax increases all create disincentives for growth, at different rates. I'd be real careful adjusting rates in the middle of our current recession/"depression".
4) we'd be better off stopping those expensive wars on terror and drugs. Cut some long-standing tax expenditures (home mortgage deduction, state tax deduction etc.) and then all the corporate tax breaks (oil, farming etc.) This will, dollar for dollar reduce our deficit.

Posted by mike c | April 28, 2008 4:59 PM

Missed this one from earlier:

"You could keep rates low on bond issues, IPO, secondary offerings, and various capital raising items and still increase the tax on gains from secondary market trading."

You could do this, but anything which makes securities worth less in the secondary market increases the cost of capital in the primary market. Market participants aren't idiots. If

Posted by Fred | April 28, 2008 5:44 PM

Re Fred's question "Don Williams,

1) (Since you like numbered points) How does one "steal" from the Social Security trust fund?"
----------------
1) When Al Gore accuses you during the 2000 debates of having a budget that runs up huge debt, you lie to the country and accuse Al Gore of "fuzzy math". Whatever the fuck that is -- Fox News never got around to asking you to define the term, did they?

2) You then take $3 Trillion out of the Social Security/Medicare Trust Fund and spend it on other things -- $2 Trillion tax cut for the rich, $1 Trillion for Big Oil and Big Defense. All part of the war on "Turur" and the need to grab Saddam's nukes before New York City is a smoking mushroom cloud.

3) You cover your $3 Trillion "loan" by putting IOUS into the accounts that you claim are "assets".

Secure in the knowledge that 50 million Republicans are too fucking stupid to realize that THEY are the ones on the hook to pay the $3 Trillion you took back to themselves. Via high future taxes on their income, their capital gains, their IRAs/401Ks or by high inflation.

4) They can take their pick -- you don't give a shit. Because by the time the stupid shits wake up and realize they will be eating dog food in their golden years, you will be down on the farm in Crawford, TX. Enjoying that Presidential retirement plus a few sinecures that some grateful "bidnesses" handed to you.

5) Reeling in the catfish and laughing your ass off every time Karl Rove takes a chug of beer, grins at you and says "Compassionate Conservative".

Posted by Don Williams | April 28, 2008 5:53 PM

Don Williams,

By law, the Social Security 'surplus' must be invested in a class of Treasury securities, i.e., lent to the federal government to be immediately spent. If you consider following that law to be "stealing" from the trust fund, then the only way to prevent the government from doing that would be for the temporary Social Security surplus to be invested in something other than U.S. Treasuries (e.g., foreign treasury bonds, stocks, etc. -- anything other than U.S. Treasury securities).

Posted by Fred | April 28, 2008 6:01 PM

Indeed, historically (although correlation is hardly causation) our period of greatest sustained and steady growth felt as such by the average American was during the period when the economy was most effected by New Deal stewardship and Big Government spending. And during this period, with the exception of Eisenhower (and guess who, last I heard, Susan Eisenhower is supporting? FWIW ...), the Presidents were Democratic and Democrats tended to dominate Congress ... hmmm ...

Posted by DAS | April 28, 2008 1:51 PM
************************************************

Which basically was the period of time (the twenty years or so following WW II) when most of the developed capitalist economies of the world other than the US had been destroyed by the war. The US had no effective competition from other countries and if our manufacturers wanted to pass on increased labor cost in their products buyers had little choice. Big government and big labor would have had to totally screw things up (luckily they didn't) to fail when no competition was around to take advantage of mistakes.

People who tout the success of those "golden years" tend to forget/ignore that fact. The lazy sloppy management culture that period produced is best displayed by how the Japanese automakers ate the lunch of the US Big Three beginning in the 1970s.

So you are correct, in this case "correlation is hardly causation"

Posted by Campesino | April 28, 2008 6:33 PM

Re Fred's comment "If you consider following that law to be "stealing" from the trust fund, then the only way to prevent the government from doing that would be for the temporary Social Security surplus to be invested in something other than U.S. Treasuries (e.g., foreign treasury bonds, stocks, etc"
------------
Bullshit. Bullshit. Bullshit.

You could have reduced payroll taxes and let the common citizens keep the money -- instead of transferring it to the superrich 2%.

OR, Bush could have REDUCED the other part of the federal debt -- the "Debt held by the Public" a corresponding amount. The federal debt when Bush took office was somewhere around $5 Trillion and I think the amount held by the Trust Funds was around $1 Trillion and the amount held by the public (including foreign investors) was around $4 Trillion.

It would have been ok to have shifted the mix -- to move $3 Trillion worth of Treasury bonds into the Trust Fund PROVIDED you reduced the part held by the public by a corresponding amount. (Because the reduction in the public part would have set you up in better shape to pay off the Trust Fund Bonds at a later date.)

INSTEAD, Bush stole $3 Trillion from the Trust Funds while ALSO running up the part of the debt held by the Public (held by the Chinese , actually).

IF Bush had raised taxes by even a fraction of the $5 trillion deficits he has run up, the voters would have been raising hell.

Instead, by stealing from their pension fund, he's gotten away with theft until it's too late for the voters to do anything about it.

Posted by Don Williams | April 28, 2008 7:39 PM

Campesino,

"People who tout the success of those "golden years" tend to forget/ignore that fact."

This animates a lot of the "where else are they going to do business/invest?" attitude of American leftists today.

Don Williams,

"You could have reduced payroll taxes and let the common citizens keep the money"

No you couldn't have, my angry friend. The law (since the Greenspan commission in '83) requires the temporary surplus to go into the trust fund where it is then effectively lent to the federal government to spend immediately. Bush did open the door to Congress to reform Social Security, but whatever their objections (some valid) to Bush's plan, Congressional Democrats made no counterproposal, preferring to demagogue the issue instead.

Posted by Fred | April 28, 2008 8:04 PM

Re Fred's comment "This animates a lot of the "where else are they going to do business/invest?" attitude of American leftists today."
-------------
Actually, what animates my attitude is the idea that we should slap a 60 percent surtax on all income earned abroad -- to cover the cost of the huge defenes establishment needed to protect those foreign investments.

After all, when I ask why US military spending is more than the rest of the world combined, the only plausible answer i get is that the US government needs to maintain order so that those investments don't go down the toilet.

For example, would the Fortune 500 have moved so much of their IT over to India if they were told that they're on their own if Pakistan decides to nuke their databases?

Face it -- the globalization advocates are two-faced hypocrites.

Actually, their wealthy patrons never allowed a public debate to even get off the ground so their whores have not had to lie as much as say , Big Oil or the Israel Lobby.

But our plutocrats would never have moved their investments abroad if they had not known that the whoring US government would protect their investments, twist the arms of foreign rulers, and stick the common US citizen with the bill --both in taxes and in blood.

That's why up until the fall of the Soviet Union, imports only made up roughly 4 percent of the US economy and exports were about the same. Foreign trade didn't become a huge part of the US economy until after the USSR collapsed. Yet during that period of near autarky prior to 1989, our economy and people did well.

There's no economic argument for globalization or for allowing our plutocrats to invest abroad.

Well, unless your economist's idea of intellectual integrity consists of the motto "he whose bread I eat, his song I sing."

Posted by Don Williams | April 28, 2008 8:56 PM

Re Fred's comment "No you couldn't have, my angry friend. The law (since the Greenspan commission in '83) requires the temporary surplus to go into the trust fund "
-------------
The Republicans controlled both houses of Congress plus the White House. They could have changed the law.

Hence, a Strange Idea: The Republicans are to BLAME for what happened on THEIR Watch -- the theft of $3 Trillion from the Trust Fund.

Why is it that Republicans think the idea of "personal responsibility" should apply to some of the most unfortunate people in this country but should NOT apply to --you know -- Republicans.

Posted by Don Williams | April 28, 2008 9:13 PM

That's why up until the fall of the Soviet Union, imports only made up roughly 4 percent of the US economy and exports were about the same.

I'm too lazy to look that up but that's not how I remember it at all. I was a kid in the 80's but I remember watching the manufacturing sector blow away like tumbleweeds where I lived and I remember an enormous volume of bitching about the trade deficit.

Posted by Ed Marshall | April 28, 2008 9:18 PM

FRED writes "Raising capital gains tax rates discourages risk-taking and investment in this country,"

There is no evidence for this claim.

Posted by Steve J. | April 29, 2008 1:17 AM

Don Williams,

Your comments suggest you still don't understand what the Social Security trust fund is or how it works. Why not do some homework on it?

Steve J.,

If the government raises taxes on [fill in the blank], all else being equal, would you expect to see more of [fill in the blank] or less of it? Take all the time you need to gather evidence.

Posted by Fred | April 29, 2008 1:29 AM

Lower capital gains and dividends tax rates REDUCE the incentive to invest in capital additions, as they don't distinguish between pre-existing and new investment.

If new capital investment in NEW plant/equipment, NEW enterprises were identified as such and ONLY given the preferential treatment, then thats where the money would go, and most likely improvements in productivity would follow.

When capital gains and dividends rates are lowered defined as a security held for a period, it encourages speculation (long-term) more than it encourages investment in productive capital assets.

On IRA's and 401(k). The limit on contributions to a convention IRA are $4000 in 2007, not $20,000 as someone mentioned earlier.

In an IRA or 401(k), there is no taxation on capital gains. The only taxation that occurs is when the funds are withdrawn and those are at the higher ordinary income rates.

Whereas it used to be a no-brainer to recommend contributing as much as one can to an IRA or 401(k) as the tax benefits were significant, now, with the reduced capital gains rates, its six of one/half dozen of another.

The taxation on a security that realizes a gain in 20 years, is STILL deferred. The tax is not paid until 20 years from the time of the investment, but at a lower tax rate than if the same transaction occurred within and IRA.

The most important issue in current taxation includes BOTH components of fairness and components of economic public policy.

That is that WORK is taxed at a FAR higher rate currently than speculation and other unearned income.

Work is taxed at a minimum of 15.3% (social security and fica), increases to a maximum of 46% (15.3% fica + marginal tax rate) at $90,000 gross income, then declines to eliminate the social security portion.

In New York, $90,000/year for an individual is a good mid-middle class income. The middle class pay the maximum.

In contrast, if one earns all of their income from dividends and long-term capital gains (or construed as such) they pay a MAXIMUM of 15% federal income tax.

Work is taxed at 46%, while speculation is taxed at 15%.

Three times the rate.

The tax effect is real. Combine that with the reality that social security receipts are commingled into the federal government definition of tax receipts and spent as if they are commingled, and reported as if they are commingled (the federal deficit for example), and there is a LARGE irregularity.

For society to realize increases in its aggregate wealth, it is work and small enterprise (also most often taxed in the same manner as work) that accomplish that.

Investment in securities only represents a redistribution, not an investment, and not an accomplishment.

Posted by Richard Witty | April 29, 2008 6:13 AM

On IRA's and 401(k). The limit on contributions to a convention IRA are $4000 in 2007, not $20,000 as someone mentioned earlier.

I was talking about the combination of an IRA and 401(k). Contribution limits to IRAs have been raised to $5000, this year. Contributions to 401(k)s are up to $15.5k. Thus, the total of $20k that I mentioned.

Basically, if you're maxing out those investment vehicles every year, then how much money can you possibly have left over for a taxable investment portfolio? The answer is, not much. Anyone claiming that the middle class is facing significant capital gains taxes is just dishonest. Insofar as they are affected, they're choosing to be affected by diverting their income away from untaxed accounts.

Posted by Tyro | April 29, 2008 8:24 AM

Personally, I think it is foolish to put money into IRAs or 401Ks instead of paying tax on it now and keeping the remainder as wealth that can't be touched by the government.

Money in IRAs/401Ks is TRAPPED -- that's the purpose of those mechanisms. It can't be taken out without a 10% penalty plus taxes and it is recorded by the government.

Since it is in before tax dollars , it can be taxed by future governments at as high a rate as they want. And I think those future tax rates will be very high -- I don't see any other revenue source that future governments can tap to pay off the $10 TRillion Reagan/Bush debt when the baby boomers retire and start putting HUGE NEW demands on Social Security/Medicare.

When the government has to start PAYING OUT the payroll taxes that have been PUT IN over the past 40 decades.

Posted by Don Williams | April 29, 2008 9:09 AM