Slate’s Matthew Yglesias is on the same track as Matthews here, writing that “Mitt Romney’s effective tax rate is very low. Most economists think it should be.”
Even researchers like Thomas Piketty and Emmanuel Saez (see “A Theory of Optimal Capital Taxation”) who dissent from the standard no taxation of investment income position think capital income should be taxed more lightly than labor income.
I’d note that in that report, Piketty and Saez write that an optimal capital tax rate would be between 50 percent and 60 percent. Moreover, there’s an increasing amount of dissent amongst economists, if you take the word of The Economist, which is nobody’s idea of a left-wing rag:
But some economists are questioning the prevailing view, not least because reductions in capital-tax rates appear to have delivered more inequality than growth…
That is because the growth costs of capital taxes are overestimated. The old models contend that capital supply is highly sensitive to changes in tax policy, and that a zero tax rate is needed to prevent capital from drying up over the long run. This looks unrealistic, the authors reckon. Most capital-income taxes are paid by working-age adults saving for retirement, who will continue to save despite taxes. Stubborn savers make for a stable supply of investment capital, limiting the impact of taxes on growth. In the authors’ estimation, a 36% capital-income tax rate is justified.
And just how solid is that economic consensus about low capital taxes? I’d say it’s at least worth noting that Paul Krugman, the leading liberal economist, says that capital shouldn’t be privileged over other income (emphasis mine):
So, the case for low rates on capital gains is that by taxing investment income as ordinary income, we effectively discourage saving: if you spend your income now, you pay taxes only once, while if you invest for the future, you pay taxes twice, so eat, drink, and be merry.
There is, however, no evidence that this effect is at all important.
Meanwhile, by taxing income at very different rates depending on how it manifests itself, we create huge incentives to manipulate income to make it come out in the favored form. And this has real economic costs.
Mark Thoma agrees with Krugman. So does Jared Bernstein. So does Dean Baker, who writes, “It is most definitely not the case that economists agree that Mitt Romney should be paying his current 14.1 percent tax rate or less as Washington Post readers were told by Dylan Matthews today.” Uwe E. Reinhart is on board, as is Tax Policy Center (for capital gains), the Congressional Research Service, etc. etc.
Nocera concludes that “The idea that a lower capital gains rate spurs economic growth is one of the enduring myths of conservative thought.”
It’s an enduring myth in liberal thought too—at least in some circles.
— Further Reading:
Wealth Over Work. The Washington Post excels; Indiviglio misses the point.
It is an axiom of tax policy that you tax more that which you wish to discourage, and less that which you would encourage.
Taxing labor more than capital is a perfect manifestation of favored policy, both by GOP and Dems. Work is smelly and icky. People who work are uncouth and, thankfully, absent from our parties, so we don't have to listen to their boorish whining. I've seen a couple of workers but would not like to spend any time with them--and certainly would not like to encourage that sort of lifestyle.
So, of course, tax that.
DON'T tax dividends and capital gains and carried interest: we want much more of that sort of thing. Isn't that what the "opportunity society" is all about?
#1 Posted by Edward Ericson Jr., CJR on Wed 26 Sep 2012 at 06:10 PM
Ignored in all this capital gains discussion is the fact that capital gains from a retirement account is not taxed at the capital gains rate but as ordinary income. If you have a pre-tax retirement account, your withdrawals, all withdrawals, are taxed at the rates of ordinary income. If you invest in after-tax retirement accounts, the gains are taxed at ordinary income levels.
Sure, the rubes are assured that your income will be lower after retirement when you start withdrawing, and that is true. So if you are one of the lucky duckies whose retirement income is less than $8,700 per annum(single), your retirement nest egg gets taxed at the 10% rate, and you make out like a bandit. If your retirement income is less than $35,350 any income over $8,700 is taxed at 15% the same rate as capital gains, more than Mitt Romney. Then if you have a decent retirement income, anything over $35,350 is taxed at ordinary income rates.
(Of course, if you are in the 10 and 15% bracket, you are not liable for actual capital gains tax on your private investments, but you *are* for your retirement account investments.)
I get a rationale that your pretax contributions is taxed at ordinary income levels, but why are the capital gains on your retirement investments taxed at ordinary income levels? Because, I imagine, that the rubes don't have lobbyists working in Washington, and plus, you don't really *get* the difference until it becomes important, i.e., after you retire.
It's a big racket foisted upon the rubes, with fund managers making out like the bandits that they are. Why don't retirement funds accrue as much capital gains as other investment funds? They generally don't even track index funds. But you are kind of stuck, because defined benefit is pretty much a thing of the past, and with defined contribution, the boss and the fund managers pretty much have you by the short hairs. But you don't know what a dupe you are until after you retire.
(note: I may have some of these details wrong, IANATA, but I think I have the basics right.)
#2 Posted by James, CJR on Wed 26 Sep 2012 at 10:11 PM
The argument behind the argument is that capital is a limiting resource. This has not been the case for a long, long time.
If you pick up the Wall St. Journal and read the news columns, you will immediately see what the editors don'tm-- that there is way more capital out there than anybody can think what to do with.
Another benefit of the New Deal, by the way,
#3 Posted by Harry Eagar, CJR on Fri 28 Sep 2012 at 04:07 PM