Uncommon Sense

January 19, 2012

Tax Mumbo Jumbo

Too many progressives and liberals go along with the argument that capital gains taxes should not be raised because “when capital gains taxes go up, there is less capital and that hurts the economy.” This is hokum. I have no way of telling that “as capital gains taxes go up, investing goes down” but for the sake of argument, let’s go along with it and let’s see if this is a “bad thing” or a “good thing.”

If this argument is correct, then taxes on wages should not be raised because “if taxes on wages go up, working will go down.” This sounds like a crazy argument, right? Why does this argument sound crazy while the other does not? The reason is wage earners, like you and me, don’t have the option of not working. If we don’t work, we don’t eat. So, if taxes go up, we are just stuck. But, rich people investing is another matter. If capital gains go up, they have the option of not investing in capital markets. But if they put their money in saving accounts, their interest is ordinary income so, that doesn’t work. And . . . , well, just what will they do with their money? If they just sit on it they make no return. Take it overseas? Maybe. But I think people will just go on investing as they have, possible with slightly more tax paid but still making a return on their investments.

Other say that this is a “risk v. reward” thing. Investors are taking the risks, they should get the rewards. Another bogus argument. The tax is only on gains, meaning their risks paid off. If they take losses, those are deductable and no tax is paid. The tax is on rewards, not risks.

What people don’t talk about is whether there is sufficient capital available. Businesses are currently sitting on over $2 trillion of cash reserves. Banks have money but they are not lending it. And recently we had a huge spike in gasoline prices because there was a glut of capital in the capital markets and they took to bidding up the price of petroleum futures. Too much capital can be as big a problem as too little, so how can we manage how much capital is available? No, not Satan, Church Lady! Tax policy, maybe?

The only real argument is this: should gains made by investing one’s money be taxed at a different rate from gains made by one’s labor? This is the real debate: labor vs. capital—which one should be favored? The answer: neither. Taxing capital gains at lower rates than on ordinary income is insulting to working people and antidemocratic besides. It allows wealthy people to not work and increase their wealth and power over time. (Hey, SCOTUS said that political money is free speech, so the more money you have for political purposes, the more free speech you have.) We have seen the effect of the tax rate drops on the wealthy in the recent obscene wealth disparity developing in this country. And we are seeing currently what the free speech money from rich people is doing to our electoral processes.

In the 1960’s, the marginal federal income tax rate on the very highest amounts of income was near 100%, consequently the wealthiest people in the country had a de facto cap on their earnings, so they deferred their income, that is they locked it up for long periods of time so they wouldn’t have to pay taxes on it right now. Currently, the Mitt Romneys of the U.S. get the benefits only rich people have in deferring income, and also the ability to stash money in tax havens (offshore funds that aren’t currently taxable), while claiming only that income that is taxed at the very lowest rate. While those of us who work for a living can’t do that. We need the money we make to pay the rent, the car payment, and buy food.

The “flat taxers” have got it wrong, too. They are right in that everybody should be paying the same rates. Everybody should pay nothing on the first $20,000, then a slightly higher percentage up to $50,000, a slightly greater percentage up to $100,000, a even slightly higher percentage up to $1,000,000 and an even higher rate above that. This is called a progressive income tax and is a cornerstone of our tax system. Everybody, but the poorest, pays something and the more you make, the more you pay at ever increasing rates. Unlike now where the richest pay at rates lower than the middle class because, well, they are so fracking special.

Capital gains are not special, tax them as ordinary income and stop insulting us.

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