# Democrats' latest tax proposal **URL:** \ **Category:** Great Debates\ **Created:** [January 17, 2015, 4:53pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075 "2015-01-17T16:53:53Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Stringbean](https://avatars.discourse-cdn.com/v4/letter/s/d6d6ee/32.png) [@Stringbean](https://boards.straightdope.com/u/Stringbean)\ **Post date:** [January 18, 2015, 12:07am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/21 "2015-01-18T00:07:54Z")
Sam Stone, Thank you for providing a cogent example of the deficiencies in raising capital gains. I can see how it would have the effect of dampening investment in start-ups. I think the question in my mind is whether activity as risk-laden as small-firm private investment would be drastically affected. After all, as you mentioned, there are a multitude of safer investment opportunities like treasuries, real estate, or stock. It would seem that those looking to invest in new start-ups are essentially treating their capital as “informed gambling money,” given the high propensity for failure. I’m not sure I believe that the added factor of having to pay higher capital gains–should you strike a winner–would be a major inhibitor to new investment. I imagine the impact would be minor. ---
**Author:** ![D\_Anconia](https://avatars.discourse-cdn.com/v4/letter/d/67e7ee/32.png) [@D\_Anconia](https://boards.straightdope.com/u/D_Anconia)\ **Post date:** [January 18, 2015, 12:57am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/22 "2015-01-18T00:57:51Z")
> [@RTFirefly](#): > > I like the 0.1% financial transactions tax. Applying that tax is practically like picking money up off the sidewalk. Under the proposed law, what is considered a “financial transaction” for purposes of taxation. Direct deposit from employer to employee is a financial transaction. So is transferring money from one’s checking account to a savings account. ---
**Author:** ![Bone](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bone/32/407_2.png) [@Bone](https://boards.straightdope.com/u/Bone)\ **Post date:** [January 18, 2015, 1:26am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/23 "2015-01-18T01:26:05Z")
> [@Stringbean](#): > > Aren’t 401K’s are generally very long-term investments, which are typically taxed at lower rates than short-term investments? > > Also, would “middle-class” retirement plans be significantly impacted by raising the cap at the highest levels? I made a mistake earlier. 401k distributions aren’t subject to cap gain tax for qualified distributions - they are subject to regular income tax. ---
**Author:** ![Nothar](https://avatars.discourse-cdn.com/v4/letter/n/ce73a5/32.png) [@Nothar](https://boards.straightdope.com/u/Nothar)\ **Post date:** [January 18, 2015, 1:35am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/24 "2015-01-18T01:35:48Z")
> [@Bone](#): > > A 35%cap gain tax would impact quite a few 401k distributions - a popular savings vehicle for a huge portion of the middle class. Distributions from 401(k)'s or Traditional IRA’s are taxed at ordinary income tax rates, not capital gains rates. So a change in capital gains taxes has zero effect on anyone’s 401(k) plans, as any trades within the retirement plan are not subject to taxes and all distributions are subject to ordinary instead of capital gains taxes. ---
**Author:** ![Budget\_Player\_Cadet](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/budget_player_cadet/32/205_2.png) [@Budget\_Player\_Cadet](https://boards.straightdope.com/u/Budget_Player_Cadet)\ **Post date:** [January 18, 2015, 1:53am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/25 "2015-01-18T01:53:36Z")
> [@Sam\_Stone](#): > > This is the biggest economic fallacy currently in vogue. You’re treating the economy as if it’s a perpetual motion machine - people get more money to spend, so they spend it, which raises profit, which creates more tax revenue, which we give to the middle class, which causes them to spend even more… What could go wrong? > > What could go wrong is that you don’t spend your way to prosperity. The notion that increasing spending to improve the economy, if it’s right at all, is only right under the condition where a _temporary_ shock to the economy causes irrational savings, which causes people to spend so little that production drops so much that real productive assets like factories close, when they would otherwise be open if consumers were spending a ‘rational’ amount of money. You know, even ignoring how problematic this implication is, _that’s totally where we are right now_. After the housing bubble, we had a massive drop in demand caused by everyone trying to pay off some of the massive household debt overhang, which led to the economy freezing and the effects we’re seeing to this day. And there’s been extensive analysis on this, examining things like the [lost GDP and even lost potential GDP](http://www.newrepublic.com/article/117976/us-potential-gdp-vs-gdp-shows-great-recessions-long-term-damage). > [@](#): > > Somewhere along the way, some people who believe in expansive government realized that they hit upon a way to reformulate this as, “Spending increases wealth” as a general rule, and this then allows them to have their cake and eat it too - to tax the rich while claiming to actually improve economic growth. > > It’s total, utter nonsense. Economic growth comes from capital investment and intellectual innovation. It doesn’t even make sense from a Keynesian perspective, because you’re not talking about borrowing and spending - you’re talking about merely shifting wealth from one area of society to another. Yes, the poor may have a greater ‘propensity to consume’ and spend more of the money on consumption goods, but the rich take that money and invest it, This seems like a phenomenally poor argument to make when [investments are so far down compared to where they were before the recession](http://business.financialpost.com/2014/06/11/the-worlds-richest-people-are-sitting-on-gigantic-piles-of-cash-that-arent-earning-them-anything/) - Yet the survey’s cash levels are more than twice the levels registered in the equivalent survey from the height of the pre-crisis go-go years in 2006 and 2007. The problem is, indeed, at least in part, that rich people are just _sitting on it_. Because why should they invest now? Demand sucks. People are trying to save money. The idea that this recession is somehow supply-side is just ridiculous, and I have trouble believing that people can still believe that. > [@WillFarnaby](#): > > In order for consumption to increase, production must increase first. You cannot consume without first producing. Moving dollars from rich people to poor or middle class people does not increase production, it inhibits capital formation, and consequently inhibits production. Inhibiting production decreases consumption and impoverishes society. > > Supply is important because without it people will go without. Demand is important because it directs resources to accomplish the desired ends of consumers. Supply is the engine of the ship, while demand is the captain. :smack::smack::smack::smack::smack: ---
**Author:** ![China\_Guy](https://avatars.discourse-cdn.com/v4/letter/c/779978/32.png) [@China\_Guy](https://boards.straightdope.com/u/China_Guy)\ **Post date:** [January 18, 2015, 2:18am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/26 "2015-01-18T02:18:12Z")
you missed the build it and they will come school of thought… ---
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [January 18, 2015, 3:12am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/27 "2015-01-18T03:12:59Z")
> [@Bone](#): > > I made a mistake earlier. 401k distributions aren’t subject to cap gain tax for qualified distributions - they are subject to regular income tax. Correct - and it is not too hard for ordinary income tax rates on retirement income to exceed the current 15% capital gains tax. So, with the current scheme retirees can pay a higher rate than the 1% living off capital gains. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [January 18, 2015, 10:35am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/28 "2015-01-18T10:35:45Z")
This is an interesting intellectual exercise, but it has 0% chance of getting through Congress. We all know that, right? > [@BPC](#): > > The idea that this recession is somehow supply-side is just ridiculous… What’s ridiculous is the idea that we’re in a recession. The “Great Recision” ended years ago. If we were still in one, it would surely be called The Obama Recession, and it would have been the longest one in history. ---
**Author:** ![Budget\_Player\_Cadet](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/budget_player_cadet/32/205_2.png) [@Budget\_Player\_Cadet](https://boards.straightdope.com/u/Budget_Player_Cadet)\ **Post date:** [January 18, 2015, 11:00am UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/29 "2015-01-18T11:00:58Z")
> [@John\_Mace](#): > > What’s ridiculous is the idea that we’re in a recession. The “Great Recision” ended years ago. If we were still in one, it would surely be called The Obama Recession, and it would have been the longest one in history. Well, what’s the term for an economy that’s slowly recovering but still acting far below its potential? We’re still in a slump (or maybe not, this year was pretty great, but we have been for quite a while). And the cause of this slump is almost entirely demand-based. ---
**Author:** ![Happy\_Fun\_Ball](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/happy_fun_ball/32/17664_2.png) [@Happy\_Fun\_Ball](https://boards.straightdope.com/u/Happy_Fun_Ball)\ **Post date:** [January 18, 2015, 3:49pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/30 "2015-01-18T15:49:22Z")
> [@ITR\_champion](#): > > \… France tried higher taxes on the rich, and hundreds of thousands of rich people left the country, making France’s financial situation worse. But if the tax increase on the rich isn’t too large I doubt it will cause huge problems. Can you show me some documentation of this? I have read papers on the effect of taxes on migration, and the correlation is not clear in the papers I have seen. ---
**Author:** ![iiandyiiii](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/iiandyiiii/32/7924_2.png) [@iiandyiiii](https://boards.straightdope.com/u/iiandyiiii)\ **Post date:** [January 18, 2015, 3:54pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/31 "2015-01-18T15:54:43Z")
I have little doubt that sufficiently high taxes can do all sorts of bad things, but I see no reason to believe that the levels proposed come even close to these levels. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [January 18, 2015, 6:49pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/32 "2015-01-18T18:49:53Z")
> [@Budget\_Player\_Cadet](#): > > Well, what’s the term for an economy that’s slowly recovering but still acting far below its potential? We’re still in a slump (or maybe not, this year was pretty great, but we have been for quite a while). And the cause of this slump is almost entirely demand-based. [“The economy”](http://bea.gov/newsreleases/national/gdp/gdp_glance.htm) is doing just fine. It’s those pesky people in it that are hurting! I don’t know that we have a term for economic well being and fairly stagnant wages. Could be that we’re in some new type of business cycle, or could be that employers are still gun shy after TGR. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [January 18, 2015, 7:19pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/33 "2015-01-18T19:19:10Z")
> [@China\_Guy](#): > > you missed the build it and they will come school of thought… Name something you have consumed without it first being produced. ---
**Author:** ![Magiver](https://avatars.discourse-cdn.com/v4/letter/m/4491bb/32.png) [@Magiver](https://boards.straightdope.com/u/Magiver)\ **Post date:** [January 18, 2015, 7:39pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/34 "2015-01-18T19:39:42Z")
> [@PastTense](#): > > Do you remember that the U.S. had a top income tax rate of 91% (top bracket $200,000) when Republican Eisenhower was President in the 1950s? During this time the United States had overwhelmingly the strongest economy in the world. We had the strongest economy in the world because all the other industrialized countries suffered significant war damage from WWII and were still rebuilding. It was a one time economic gift. ---
**Author:** ![Stringbean](https://avatars.discourse-cdn.com/v4/letter/s/d6d6ee/32.png) [@Stringbean](https://boards.straightdope.com/u/Stringbean)\ **Post date:** [January 18, 2015, 7:58pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/35 "2015-01-18T19:58:29Z")
> [@jasg](#): > > Correct - and it is not too hard for ordinary income tax rates on retirement income to exceed the current 15% capital gains tax. > > So, with the current scheme retirees can pay a higher rate than the 1% living off capital gains. Yikes. ---
**Author:** ![Fuzzy\_Dunlop](https://avatars.discourse-cdn.com/v4/letter/f/848f3c/32.png) [@Fuzzy\_Dunlop](https://boards.straightdope.com/u/Fuzzy_Dunlop)\ **Post date:** [January 18, 2015, 10:18pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/36 "2015-01-18T22:18:26Z")
> [@Stringbean](#): > > Aren’t 401K’s are generally very long-term investments, which are typically taxed at lower rates than short-term investments? FYI, gains on investments are either short-term and taxed just like regular income, or long term and taxed at whatever the capital gains tax rate is. Except, the threshold for an asset to be long-term is only 12 months. There’s no difference between long-term and \*very \*long-term investment. It’s not like if you hold your mutual fund for 50 years you’re slowly earning a lower tax rate on its gains. People in this thread have been talking about specifically about raising the capital gains rate, so it doesn’t make any sense to point out they’re typically taxed at lower rates. That’s exactly what people are talking about changing. Also as people pointed out, 401(k) disbursements are already taxed as regular income. ---
**Author:** ![Der\_Trihs](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/der_trihs/32/233_2.png) [@Der\_Trihs](https://boards.straightdope.com/u/Der_Trihs)\ **Post date:** [January 18, 2015, 10:31pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/37 "2015-01-18T22:31:09Z")
> [@WillFarnaby](#): > > Name something you have consumed without it first being produced. If it can’t be\* afforded,\* the only thing producing more product will do is result in closed factories and a fuller landfill. The world economy has been suffering from _too much_-productive capacity for decades, not \*under-\*production. Giving even _more_ money to the wealthy won’t cause them to invest more in factories to build products no one can buy. ---
**Author:** ![Stringbean](https://avatars.discourse-cdn.com/v4/letter/s/d6d6ee/32.png) [@Stringbean](https://boards.straightdope.com/u/Stringbean)\ **Post date:** [January 18, 2015, 10:34pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/38 "2015-01-18T22:34:35Z")
> [@Fuzzy\_Dunlop](#): > > People in this thread have been talking about specifically about raising the capital gains rate, so it doesn’t make any sense to point out they’re typically taxed at lower rates. That’s exactly what people are talking about changing. If the argument is being presented that raising capital gains will affect middle-class retirement savings, then the bracket wherein middle-class incomes fall is important, as well as whether typical middle-class retirement packages would even be affected. I was not the one who suggested 401k’s would be affected by raising capital gains. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [January 18, 2015, 10:42pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/39 "2015-01-18T22:42:19Z")
> [@Der\_Trihs](#): > > If it can’t be\* afforded,\* the only thing producing more product will do is result in closed factories and a fuller landfill. The world economy has been suffering from _too much_-productive capacity for decades, not \*under-\*production. That’s a nonsensical statement as it assumes capacity is fungible. There’s too much capacity for buggy whips and typewriters but not enough for smartphones or electric cars. Spend $10B on a state-of-the-art IC plant, and it’s pretty much worthless a decade later. > [@](#): > > Giving even _more_ money to the wealthy won’t cause them to invest more in factories to build products no one can buy. Well, Tesla’s business plan is the double production every year for the foreseeable future. That’s peanuts, of course, but the more important thing in terns of US jobs is whether or not rich people and corporations are going to invest in capacity in the US. And that’s a complicated process of which taxes are just a part. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [January 18, 2015, 11:10pm UTC](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075/40 "2015-01-18T23:10:39Z")
> [@PastTense](#): > > Do you remember that the U.S. had a top income tax rate of 91% (top bracket $200,000) when Republican Eisenhower was President in the 1950s? During this time the United States had overwhelmingly the strongest economy in the world. What the top bracket was is irrelevant if there were many more loopholes or ways to avoid paying that tax. [Piketty and Saez](http://eml.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf) studied historical tax rates and found: > [@](#): > > However, the conclusion that these three changes have reduced the progressivity of the federal tax system is less obvious than it may at first appear. For example, in the case of the individual income tax, the numerous deductions and exemptions mean that the tax rates listed in the tax tables might be a poor measure of the actual tax burden faced by each income group. In addition, some forms of income, such as capital gains, have traditionally faced lower tax rates; this benefits disproportionately high-income taxpayers. Table 2 in that paper is very useful (Page 13). It shows that in 1960, the top marginal rate for people in the top 1% to top .5% was 34%. For the top .5% to the top .1%, it was 41%. For the top .1% to the top .01%, it was 55.3%. The highest top marginal rate was 71%, and only affected the top .01% of the population. So the vast bulk of ‘rich people’ paid between 34% and 50% in tax. The effective tax rate for the top 1% dropped during the recession, both because income dropped and more losses occurred that could be deducted, but as of this year it’s right back up around 34% So the ‘91% tax bracket’ is a myth when used to argue that the top 1% are severely under-taxed compared to the past. The top .01% and up are really the only group that pay substantially less tax now. And the upper-middle class pay more in tax today than it did then. However… One thing that 91% tax bracket and all its exemptions did was distort the economy by forcing people to make decisions for tax reasons other than for optimal efficiency reasons. So when Kennedy lowered the top rate to 71%, and then Reagan lowered it all the way to 28%, the government’s tax revenue actually went UP from 15% of GDP to 18% of GDP. In fact, tax revenue has hovered between 15% and 20% of GDP from the 1950’s to today. Top marginal rates have very little to do with revenue because they apply to so few people, and because the higher rates lead to more tax avoidance activity. [Previous page](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075.md?page=1) [Next page](https://boards.straightdope.com/t/democrats-latest-tax-proposal/710075.md?page=3)