Tuesday, February 7, 2012

Tax Fairness - eliminate lower rates for capital gains

Mark Schmitt at "New Deal 2.0":
The special rate for capital gains and dividend income is the first problem to fix in tax reform, and not just for millionaires or those over $250,000. It creates enormous distortions in economic activity — all the complicated-sounding loopholes you hear about, like the “carried-interest loophole” or the “founders’ stock loophole,” are really just scams to redefine ordinary income as capital gains to get the preferred tax rate. Eliminate the special rate and the loopholes disappear.
Nor do lower rates for capital gains, in the long-term, promote growth or encourage investment that wouldn’t otherwise occur. Economist Alan Blinder pointed out in 2007 that after the Tax Reform Act of 1986 eliminated the special rate for capital gains, the economy continued to boom. The better “Buffett Rule” should be simply, “All income should be taxed in the same way, regardless of whether it comes from work or investment.”
Note: It's useful to remind ourselves of who was President when the Tax Reform Act of 1986 was passed, eliminating special lower rates for capital gains income.  Ronald Reagan championed this reform, which raised taxes on capital gains by thirty percent with no apparent impact on investment or GDP growth. The rates were eventually lowered under both Bushes.

Who benefits from this tax loophole?  According to Forbes editor Robert Lenzer (via Eric Alterman), "The top 0.1 percent—about 315,000 individuals out of 315 million—are making about half of all capital gains on the sale of shares or property after one year; and these capital gains make up 60 percent of the income made by the Forbes 400."