Joseph C. Sternberg expresses concern about the likelihood of increasing capital gains taxes in the near future in his most recent Wall Street Journal column:
Expect monetary policy to bleed slowly but surely into tax matters as well. The vector will be capital-gains taxation, which is booming in the current recession, contrary to all economic logic.
Surging capital-gains revenue helps explain why blue states such as California aren’t currently in the red. Politicians are taking notice. Minnesota’s and Washington’s governors are proposing higher capital-gains tax rates, the Journal reported this week, as are Democratic lawmakers in Connecticut. Some New York Democrats aim to leave no capital gain behind, even the unrealized sort—a plan is on the table to mark taxpayers’ assets to market and then tax paper gains every year.
Capital gains also figure prominently in most Democratic plans to tax the rich at the federal level. President Biden proposed on the campaign trail last year that wealthier filers pay a capital-gains rate equal to their ordinary income rate, which he would raise to 39.6%.
It’s a truism that if you tax something you get less of it. Do we really want less income or investment? I don’t think so. I would argue that we should want less goods consumption, particularly the consumption of imported goods which is why a national sales tax or VAT as an replacement for the income tax makes economic sense.
Unfortunately, many politicians think more like Willie Sutton than like economists so I won’t be surprised if we see an increase in the capital gains tax soon.
IMO what we could really use is reform in the law regarding capital gains so that investment, particularly domestic investment, is taxed less while money spent speculating shouldn’t be deductible at all. A lot of this would be rendered moot if the corporate income tax were to be abolished entirely as it should. But I can’t see that happening in the foreseeable future.
I would point out capital gains tax is a one-time revenue generator.
i.e. one has to have gains to be taxed; and with valuations at such high levels in everything (bonds, stocks, housing); even an increase in asset values at a lower rate then today would generate disappointing amounts of tax revenue. If asset valuations decrease, its even worse, a government could actually have lose revenue due to capital loss deductions.
Actually I support a tradeoff — tax capital gains as ordinary income, but the cost basis is adjusted by inflation. It would treat capital and labor income exactly the same.
Could we at least tax carried interest at ordinary income rates? I have long agreed with doing away with corporate income taxes but I dont think that alone will keep people from finding a way to game things. I do like the idea of adjusting cost basis for inflation.
Steve
“Do we really want less income or investment.”
Of course not. Empirically, the evidence is in, cap gains tax up, revenue down. The Willie Sutton reference is apropos.
My concern over a VAT is the obvious one. It will be additive, not a replacement.
“…while money spent speculating shouldn’t be deductible at all.”
Unless you are being facetious, you already know the problem with this. What’s the definition of speculation? Taxing ST trading is already addressed with the hold time rate differential.
Separately, I wonder if there is anyone on this blog sophisticated enough to understand why carried interest is different in kind from fee income. Do they understand that fee income for investment professionals is in fact taxed, rightfully, at OI rates? And if anyone decides to tackle the issue, please provide a crisp answer as to why the capital gains tax rate differential should be eliminated altogether, for business owners, passive investors etc. Because if you construct the carried interest argument, you may not (actually clearly do not) understand it, but that is what you really are advocating.
“..tax capital gains as ordinary income, but the cost basis is adjusted by inflation. It would treat capital and labor income exactly the same.”
This is a perfect example of misunderstanding. First, inflation adjusted basis would be nothing more than a second order effect. More importantly, labor and capital should not be treated the same, the returns are asymmetrical. You can either have a positive return to labor (income), or zero (no work). Employed capital can have a positive return; however it can be lost in its entirety – 100% negative. That’s a huge difference in risk reward. Do what’s suggested and you can kiss capital investment goodbye.