In reality, capital gains rates are lower than ordinary income simply because the owners of capital have a whole lot more political influence than the owners of labor. The argument that the guy who whiles away his days at the country club or on his mega-boat shouldn’t pay just half the tax rate of the guy who gets up everyday and goes to work to produce something for the economy are anathema to those who must continuously raise money for re-election.

There is also a one-time exemption from Cap Gains tax if you are over the age of 55. This allows older people to use their home as a retirement account of sorts when they downsize.

http://www.safehaven.com/article/11230/stock-cycles

THe article looks into the idea that low taxes are good for growth. I found that tax cuts in interest, divident and capital gains income have the expected *direct* effects. Cutting them produced more of what is taxes. For capital gains, cuts produce greater asset price rises, that is bubbles.

However the secondary effects were different. When I looked at trends in nonresidential private investment as a fraction of GDP, I saw that the effects of tax cuts were to reduce investment, which is counter-intuitive.

It turns out that the dominant factor affecting this kind of investment was the prevailing interest rate which was high or rising during low tax periods because of large deficits and high levels of financial activity.

High levels of financial activity appear to be inflationary by stimulating monetary velocity. Such high levels probably reflect the increasing amounts of investable funds resulting from the grow in size of large fortunes relative to thje economy as a whole. That is rising wealth inequality leads to rising financial acitivity that exerts an inflationary impact, first on assets and then on everything trough wealth effects on demand (e.g. rising home prices allowed additional demand funded by home equity loans). To counter this inflationary impact, policy that reduces growth in wage&salary income and/or employment is necessary.

The article has much more on this.

Mitt Romney, the Forbes Fortune 400, and Taxes

http://bud-meyers.blogspot.com/2012/01/mitt-romney-forbes-fortune-400-and.html

The sale of a person’s home falls under the category of capital gains. I know that people aren’t making much on their homes right now, but eventually they will begin to, and to tax the gain at a normal amount seems inappropriate to me. Maybe if the gain was amortized over the same number of years as the person owned their home?

I do believe that the Capital Gains tax rate drives the Stock Market. During the current “recovery” the Stock Market has been just about the only robust investment, and I would guess that a favorable tax rate is a factor in that.

So, I don’t believe that the Capital Gains tax is entirely bad. I would prefer to clean it up so that the application was limited rather than do away with it entirely.

I would love to see the data from the ‘Cap Gains Taxs & Real Investment’ graph overlain with data from some of the graphs from that Dec 2011 post. If I had a magic wand, this would be my wish-list:

– Graph #1: Income Gains at the Top Dwarf Those of Low- and Middle-Income Households It’s quite a striking comparison to see how radically the top 1% has risen just after 1984, the period when the graphs in this post also show significant change.

– Graph #4: Effective Tax Rates on Wealthy Have Fallen Dramatically (1992 – 2007) Again, quite interesting comparisons; the 277% gains appear in the same period that capital gains taxes are severely reduced.

– Graph #7: Tax Cuts, Wars Account for Nearly Half of Public Debt by 2019. If the capital gains benefit could be removed from the overall tax cuts category; how much would the ‘tax cuts’ measure shrink?

– Graph #12: Real Income for Working-Age Households Reaches Lowest Level Since 1994. If I compare that graph next to the top one in this post, it appears that real investment rises — yet real income declines — at the very time that cap gains tax rates decline. Again, the divergence between income and tax rates are striking.

I recognize that ‘correlation is not causation’, but the top graph in this post eerily mirrors, or reverse-mirrors, of some of the earnings and income patterns in those CBPP graphs.

We’ve been going through a fundamental economic shift toward a more networked economy; the economy is no longer very industrially based. Consequently, the dustup about ‘what cap gains rates have been historically’ is a red herring. It’s not a useful parameter.

The relevant question seems to be: What tax structures do emerging economic paradigms need?

Rumble away, and the sooner the better!

2. A low cap gains rate doesn’t exactly focus us on productive investments; you gain return just by making it through a year. This means investments which pay back less are favored by the math. A higher cap gains rate means you make investments that pay more. This means you invest in actual things that generate returns instead of things that generate lower returns but have the mathematical advantage of lower taxes if you make it for a year.

“Enforcing Tax Laws: Why the Rest of Us Should Care
According to the IRS, in 2001 (the most recent year examined) the
government lost more than $340 billion in uncollected taxes.2 This is money
that is actually owed to the federal government – not money that taxpayers have been able to legally avoid paying through creative accounting or the clever use of loopholes. This is a substantial sum. It is approximately 20 times what the federal government spends on Temporary Assistance to Needy Families (TANF) each year, the main welfare program for poor families. It is 55 times what the federal government spends on Head Start and almost 100 times annual foreign aid spending for Sub-Saharan Africa. Alternatively, the taxes that go unpaid each year are 30 percent of what the federal government actually collects in income taxes (personal and corporate). This means that if the federal government could find a way to get tax evaders to pay their bills, then tax rates could be reduced for everyone by 25 percent, and the federal government would have the same amount of money.

The amount of money lost through outright tax evasion would seem to be
a good argument for stricter law enforcement to ensure greater tax compliance.However, many of the obvious steps that could increase compliance have been nixed by the nanny state conservatives. For example, it would be a very simple matter to have taxes deducted from interest income on bank accounts or from dividend checks just as taxes are routinely deducted from paychecks. This would ensure that the government had at least a partial payment of the tax owed on this income, and that the IRS had a reliable record of the money that taxpayers received from these sources. If the tax deducted from this income proved to be too much or too little, taxpayers would collect the difference or make up the gap when they filed their annual returns. In fact, in the eighties the Reagan administration actually put in place rules requiring that taxes be deducted from most interest bearing accounts, but more extreme nanny state conservatives in Congress got these rules reversed.

The nanny state conservatives are anxious to thwart measures that make it
more difficult for wealthy people to evade taxes. In the late nineties there was an effort by the wealthy countries to crack down on money laundering, largely as a way to combat crimes such as drug running or illegal gambling. Shortly after President Bush took office, Treasury Secretary John O’Neil indicated that the Bush administration was not interested in this sort of law enforcement.3 In addition to outright evasion, the nanny state conservatives believe that the nanny state should give special treatment to wealthy people for a wide variety of activities. David Cay Johnston documented many practices through which the wealthy can legally avoid paying taxes in his book Perfectly Legal, and there is no reason to go through this list here.4 The wide range of legal methods available for tax avoidance may not have made the income tax an entirely voluntary payment for the wealthy, but, at the least, these tax breaks offer them a substantial discount off the taxes implied by the standard tax rates.

Indulgence of tax evasion/avoidance does not extend to everyone. In recent years the IRS has been especially vigilant in policing the returns of people claiming the earned income tax credit (EITC). The EITC is a tax credit for low income wage-earners that dates back to the Nixon administration. It was intended to offset the payroll tax that these workers pay for Social Security and Medicare. The maximum amount that a family could receive from the EITC in 2005 was slightly over $4,000, with most families receiving substantially less.

In 2003, approximately 19 million taxpayers filed to receive the EITC. The
IRS chose to ask for detailed documentation from 4 million of these filers, more than 20 percent.5 This level of vigilance in preventing false filings on the EITC is impressive since the most money that the IRS can retrieve, even when uncovering a totally false (as opposed to exaggerated) claim to the EITC, is just over $4,000. By contrast, just 5 percent of taxpayers reporting income of more than $1 million had their tax returns audited by the IRS.6 If the main priority of the IRS is maximizing compliance with the tax code, its resources might be better spent tracking down some of the wealthy people responsible for the $340 billion in taxes that go uncollected each year than low-income workers who may have claimed a few hundred dollars too much on the EITC.”

Its an incredibly important and revealing book that’s available for free under a creative commons license for those who want to know what’s actually being discussed in those “quiet rooms.”