A Not So Capital Idea

Currently the federal tax code allows money earned based on investments, the so-called capital gains, to be taxed at the lowest rate of income taxes, 15%, lower than the average rate ordinary tax payers pay on their income. This has not always been so. None other than Ronald Reagan allowed capital gains to be taxes the same as “ordinary income,” that is the income you earn by the sweat of your brow. So why do we favor income earned by the investment of money over income earned by labor (by taxing it less). This in what we have designed to be a “progressive” tax system. In a progressive tax system, the more you earn, the higher the rate of your taxes. So, you pay 10% federal income tax on the first 8500 dollars you make, then 15% on the next $26,000, then a 25% rate kicks in for earnings over $34,500, 28% for earnings over $83,600, 33% for earnings over $174,400, and 35% for $379,150 and above (2011 rates). Obviously rich people earn more in capital gains than do poor people and some very rich people live off of their capital gains entirely, which gives some very rich people a lower tax rate than everybody else which is in direct opposition to the design of the tax system. In one case, a hedge fund manager “made” over $1 billion dollars in one year and paid only 15% federal tax. Yes, that is $150,000,000 (max, I am sure he had some deductions). But if those earnings were taxed like everybody else, his taxes would have been a little under $350,000,000. So, one man received a benefit from the federal government to the tune of $200,000,000 because . . . because. . . . (For those of you who weep over the government “confiscating” this poor guy’s “hard earned money,” he still would be making over $340,000 per hour after taxes.)

This is a very good question. Are we favoring rich people because they are the “job creators,” and we want to encourage their behavior of investing their money? Or have rich people bought off enough politicians to stack the deck on their behalf?

The basic argument for the lower tax rate on capital gains is that when people invest their money and earn interest/dividends/whatever thereby they are stoking the economic engine of the country and creating jobs. To Republicans this behavior takes on mystical or religious overtones. They think there shouldn’t be any taxes on capital gains for the most part.

But does this argument hold water? Did not Wall Street bankers using a veritable sea of such money manipulate the rules to enrich themselves and almost bankrupt the country, destroying trillions of dollars of wealth (other people’s wealth, they kept theirs) at the same time. Is this what we want to encourage?

Disregarding current Wall Street excesses, corporations are amoral creations that are designed to profit their owners, either private individuals or public stockholders, and only profit them. If you look at many of the biggest corporations they are multi-national beasts. And for many the monies invested in them actually results in jobs being exported overseas. Those corporations don’t distinguish between profits earned from overseas labor from profits earned from domestic labor. A dollar is a dollar is a dollar. So, we are subsidizing the abilities of these corporations to export jobs overseas by giving tax breaks to people who invest in them.

My personal preference would be to stop using the tax code altogether to promote behaviors. If the government, representing all of us, wishes to promote something, incentives other than tax incentives should be used, such as expedited permitting, R&D at federal research facilities, grants of federal land, building roads and bridges to connect business facilities, etc. But, if we are going to use the tax code, shouldn’t we do it using some smarts? Shouldn’t we tie the lower tax rates to investments that are doing what we want, instead of what we don’t want? Why should we subsidize the undermining of our own well-being?

A small capital tax rate for everyone is not a capital idea. I am not even sure a small capital tax rate for anyone is a capital idea.

Ignoring Ron Paul

The candidate who just missed taking first place in the Iowa Straw Poll, Ron Paul, didn’t even get a mentioned in the post-Poll rundown in favor of people who finished further down the list. Now I happen to like some of Congressman Paul’s ideas, others not so much, and as a candidate he has been consistent and well liked by a sizable portion of the electorate. One of Mr. Paul’s ideas I very much like is his idea on foreign trade and policy: he thinks we ought to deal fairly and trade will all other countries equally. Currently we have “special” trading partners and treat even our staunchest allies who deviate the slightest from our recommendations as enemies. The classic case was when France didn’t take our lead in the second Iraq war. In the first place, they were right, there was no real justification for that war and, second, what they were asked to do conflicted with their national interests. (Didn’t matter to us, we excoriated them. “May I have ‘Freedom Fries’ with my hamburger, please”)

Mr. Paul’s ideas aside, there is a reason why the press was ignoring him: according to their pundits, Mr. Paul had no chance to win. You see, actual performance is irrelevant in today’s political arena, only whether someone meets the expectations set counts. This is a little like the stock market. A company can make a 20% profit for the year, quite a spectacular performance, but some Wall Street Analysts thought they should have made 25% profit, so their stock gets sold off. A baseball player has a performance that is certainly high quality, but if it fails expectations, so-called “experts” start asking whether he should be traded. It doesn’t matter what you actually do, just how what you do compares with expectations.

Can you imagine what weather reports would be like? The weather never shapes up the way it is predicted. The evening TV reports would label each days weather as “disappointing,” I guess. This phenomenon works in quite strange ways. Consider Sarah Palin and Michelle Bachmann. Bachmann is a candidate for President, Palin teases that she “might could” run. Neither of these Republicans has ever done anything. Can you name any of their accomplishments? Even one? Nope, they haven’t done anything, and on that basis the political pundits have lavished huge amounts of attention upon the both of them. Apparently those pundits have expectations about what they would do as candidates (the terms mud wrestling and pole dancing have arisen).

So, upon what bases do these pundits create their expectations, what record do any of them have regarding their predictions? Does anyone keep score? I don’t think so.

What I think is that the 24 hour news cycle is distorting our political discourse. It has created an ever large pundit class which shapes our political ideas and discussions in ways invisible to us now. (Studies in some years will tell us what we did wrong. A fat lot of good it will do us now.)

We need alternative news sources and we need them now. We need people to look at this zoo and describe all of the strange animals in it: the Karl Rove House for political masterminds, the Money Sources Exhibit (exhibit currently closed and will stay that way) and, of course, the Monkey Island where we find all of our candidates. Unfortunately the “free press” has been bought by interest groups and is free of restraint but full of bias, especially toward the moneyed interests of the country.