About Those Capital Gains Taxes
Mitt Romney has so far refused to release information on his taxes. There is a good reason why he hasn’t. If those documents see the light of day, it will become immediately apparent that Romney is a poster child for precisely what is wrong with the American economy..
Paul Krugman writes that you don’t have to go back thirty years to see what has happened. The last twenty years provides plenty of evidence to support the notion that the game is rigged:
Since 1992, the I.R.S. has been releasing income and tax data for the 400 highest-income filers. In 2008, the most recent year available, these filers paid only 18.1 percent of their income in federal income taxes; in 2007, they paid only 16.6 percent. When you bear in mind that the rich pay little either in payroll taxes or in state and local taxes — major burdens on middle-class families — this implies that the top 400 filers faced lower taxes than many ordinary workers.
The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains — three-quarters of which go to the top 1 percent of the income distribution — warrant such special treatment.
The problem with such special treatment is that it acts like a vacuum cleaner, sucking all the wealth to the top of the economic pyramid. The bottom eventually collapses, bringing down the whole house of cards — and leaving in its wake the Great Depression and the Great Recession.
Some argue that special treatment of capital gains creates jobs. The argument that Romney’s Republican opponents are making is that it destroys jobs, while creating profits for investors. But they can’t have it both ways. And that is the bind they are in.
20 Responses to “About Those Capital Gains Taxes”
Here’s another more balanced, I think, article on our tax rates from today’s NYT.
http://economix.blogs.nytimes.com/2012/01/19/more-on-romneys-tax-rate-and-everyone-elses/
“Some argue that special treatment of capital gains creates jobs”
Maybe a little… the tax perc gets dumped into a giant formula that tells investors where they can get the best return for the money.
Well its no wonder the Republican party keeps saying, “eliminate the capital gains tax”. Heck they won’t even have to hire tax accountants then, because they will never have to pay tax! They won’t even need to game the system because they will live tax free forever.
Ya know, I was in favor of veterans getting a tax break. The breaks don’t go to the veterans, they go to rich. The rest of us are just crap to be used and manipulated in the service of the rich.
Class warfare? I wish, but so many of the rich have no class.
Would it be unreasonable to ask the supporters to calculate how much lost revenue each new job the capital gains tax cut costs the federal government?
If the reason for the tax cut is to generate new jobs isn’t it reasonable to ask just how efficient the tax cuts have been so that we can compare with other means we have to generate jobs?
There is no such thing as “costs the federal [or state and local] government”; that is a false presumption that it’s the government’s rather than the person’s money.
Now, could more taxes be raised? is a correct and honest question.
By the way, when it comes to raising more revenue (not merely the crutch but the “fix” of liberals who can’t spend enough, don’t know what “enough” means, much less “less”), don’t overlook not only basic reform but help with entitlements.
All income should be taxed at the same rate. (Don’t punish investment income as “unearned”). All income should be taxed; this lets us eliminate corporate taxes, if individual leakage is plugged.
With entitlements, the FICA cap can be raised or ended, but that’s a drop in the bucket that serious people have never seen as a or “the” serious solution to paying for the entitlements. Better is to not only raise or end the cap but levy the FICA tax on all forms of compensation.
But it doesn’t or needn’t end there, don’t you realize? Why not subject all forms of income, including the capital gains liberals hate so much (along with dividends and interest received by rich folks) to FICA taxes? What would that do for the fiscal health of the entitlements or make possible (expanding or increasing benefits)?
Think, people
Just remember we get what we deserve because the majority of Americans just sit back and take it. We think electing people to government will fix the problem, but we keep electing the same group over and over for the most part. We do not demand change and when there is any movement, it is minor in nature like the Tea party and Occupy movement.
Not until there is real rebellion like the movement against the Vietnam War and MLK’s movement for equal rights will anything change.
But there are too many people too wrapped up in their own personal wants and needs to worry about those with real wants and needs.
If there was a true movement like in the 60′s we would get tax reform so those making millions would not pay just 15% while protecting the 15% for the middle class retirement funds. We would get a balanced approach to tax increases and spending cuts to balance the budget.
But there are just too many who just keep commenting about issues, complain about the inequities in the system and stick their noses into a smart phones and forget about anything until the next article is ready to read
Agree with RP. Any meaningful change will need to come from the bottom up, that’s they way it’s always been. When the citizenry starts feeling enough pain they’ll start paying closer attention. Until then, people like Romney (and most politicians) will continue treating them as abstract annonyances.
Neither the graph above nor the article sited by dduck makes clear what’s being calculated here. Everyone who has income, even low ones, pays payroll tax. FICA is collected on income up to a little over $100K. Other taxes, including state and local, exist as well. I’m still scratching my head as to what the “effective tax rate” means, and how’s it’s calculated. Does it count as income deductions that nonetheless remain income (like 401k deferrals)?
Also,stockholders paying “corporate taxes”, an idea put forth by the NYT article, doesn’t pass the smell test.
roro,
Although I’m mostly outa here, I can’t help myself on this one. Let me try to answer your questions and then make a quick comment about the chart.
The effective tax rate is simply total Federal taxes paid divided by total income. The trick is in the definition of those two terms.
Let’s start with the easier one, total income. In general this number would include all income on the 1040 (wages, tips, cap gains, dividends) plus income sources not included on the 1040 (health insurance premiums (company paid), the employer portion of FICA, transfer payments and so forth. Different people calculate it slightly differently but that’s the general gist of it.
Now in terms of what taxes paid are, it’s general broken into 4 or 5 buckets (income taxes – capital gains are in this number), payroll taxes (both employer and employee), excise taxes, estate taxes, and imputed corporate income taxes.
The first two are easy. The last three are less easy. Both excise taxes and estate taxes tend to be done similarly, the TPC (tax policy center) or CBO compute an average by income group and apply that average to all HHs within the group for excise taxes. For estate taxes, they make an several assumptions of the same type. The argument over imputed corporate taxes goes thusly…imagine a world without corporate taxes at all. In such a world, the excess money would be paid to shareholders (through dividends or higher stock prices) and thus that money is considered a tax paid by shareholders. Pretty much every economist I’ve seen who writes about tax incidence attacks the problem this way although they all make somewhat different assumptions about the proportion of corporate taxes that ought to be pushed to capital income versus labor income.
Now as to the substance of the chart, it’s basically wrong. When Romney quotes his effective tax rate, he is referring to the things he can measure on a HH level (income taxes and payroll taxes). He is not referring to those things that cannot be measured on a HH level (excise, estate, imputed corporate). Thus the 15% number that he quoted is not comparable to the TPC table that includes 4 of the 5 types of taxes discussed (for some reason the TPC excludes excise taxes and the CBO excludes estate taxes). If one buys the theory of imputed corporate taxes and includes excise taxes, Romney’s comparable number is probably somewhere between 23 and 26 percent. This of course paints a very different picture than the TPC chart.
Hope that helps.
ETA: The reason that ETRs can be lower than FICA tax rates and indeed negative (for about 10% of HHs) is because most HHs in the bottom 2 quintiles of the income distribution have a negative Federal income tax liability. In some cases, this is large enough to offset their payroll and other tax liabilities.
There has been an accumulation of deductions exemptions, shelters, etc over the years that the tax code is a Tower of Babel.
If we have politicians, R&D, that commission tax reform studies and guidelines, then just ignore them, then we are pissing into the wind.
Sad but true.
A wealth of information as always, Steve. Good to see you’re still hanging around sometimes. Thanks. My question was more geared toward what was used in the graphs and analyses than what “effective tax rate” actually means, but I didn’t make that clear, and you answered my question anyway.
1. Excellent point about the misleading chart presented by TPM and echoed uncritically here.
2. What is overlooked by many (certaiy including Krugman in his latest tirade) is that in most cases, the decision to pay the capital gains tax is *voluntary*, in the sense that quite often the investor can choose to not sell the asset, realize the gain and incur the tax.
With that voluntary nature in mind, the CBO concluded (back in 2002) that lowering the capital gains tax could actually *raise* revenue. One might infer that raising the CG tax would therefore have the potential to reduce revenue, as investors lock up their assets rather than selling them.
In any case, the CBO was quite clear that careful studies disagree on whether lowering the tax rate raises or reduces revenue. Which suggest that the capital gains tax is hardly a vacuum cleaner.
And what’s with this:
“The argument that Romney’s Republican opponents are making is that it destroys jobs, while creating profits for investors. ”
Really? I thought they were arguing that Bain Capital was a vulture capitalist fund destroying jobs, not that all capitalists are evil or that the favorable capital gains tax rate destroys jobs. But who can stay awake through all these debates?
TM, good points…………..
I’d still like to see Bain Capital honestly described, to what extent was it a vulture operation like Wilbur Ross’s (which did a lot of good work), was it a class 1980s stereotype tear-apart-and-use-junk-debt operation, or if it largely financed start-ups, which is how venture capital firms are best known these days.
Personal income taxes are not a factor in job growth. Whether or not a company expands is based on the demand for its good or services and the competency of its management. Fiscal conservatives have done a pretty good snow job on the general public to pretend otherwise. That somehow if the money a business owner pulled out of the company to pay themselves, money they have already decided was not going advance their business or make new hires, if that money was taxed less they’d hire more people than they need. Its an absurd argument.
I’m sure several of the commentators here have been in positions to hire and fire people. Can any of you honestly tell me that income tax levels were ever mentioned during those discussions? Never, not once, in my career has that been the case. Nor have a I ever heard of anyone that made a hiring/firing choice based on income tax rates. But it makes for a nice sound bite and people eat it up.
Capital gains should be taxed exactly like federal income tax. And we need to ditch the Bush era tax cuts. We need to slow the flow of money to the top, grow the GDP fast enough to bring disposable income back to the middle class, and then the economy will bloom again once people have enough money to buy things. This will actually benefit the 1%, it benefits everyone.
Thanks slamfu for (once again) cutting to the chase. Your final paragraph says it all. The problem with Romney is that he gives no indication of either caring about or understanding the problem. His defenders seem to have little grasp of why the gross income disparity is important. Obama is marginally better (lots of pretty rhetoric) but the middle class, lower middle class, and the poor are still in a tailspin.
The idea of taxing capital gains at a lower rate is to encourage investment in production capital. However, the definition of capital gains also covers things that don’t encourage productivity in the US, such as stocks and overseas investment.
Until that’s fixed, the point is weak.
Prof, said it right: The idea of taxing capital gains at a lower rate is to encourage investment in production capital.
And the idea of lower dividend taxation is to encourage distribution of profits to investors.
When was the last time we had a shortage of production capital? Was there one I missed that was saved by the lowering of capital gains? No? Didn’t think so. It was done merely so people who make their income from investing can make more doing so. Profit is its own reward, whether its taxed at 15%, 25%, or 35%. Investors needed capital gains encouragement to invest like oil companies need tax breaks to look for more oil. Don’t kid yourself.