Raising Taxes For Fairness

Great Debates
21

True, but not trivial at all. We are de-incentivizing investment with no benefit to anybody. Sure, you’re not preventing anything - if the fat cat wants to invest, he can, he just doesn’t benefit from it as much. And there is no offsetting benefit to his loss of gains.

No, this is not a good analogy. United Way gains when people donate. Nobody gains in the situation as we described it.

It would be like United Way asking the fat cat to give them money so they could burn it.

Because allowing people to keep what they earn is fair, in general. The basic question of “who has more than who?” is not a legitimate one for government to ask. And the answer to the question even if you ask it is never “Let’s reduce this person’s income without benefitting anyone else”. Remember, the debate is predicated on the increases being revenue neutral.

The government does not have more money to transfer - the investor simply has less.

Taxes are a necessary evil. The only way to justify taxes is to point to some offsetting benefit. There is no such in the scenario we are describing. Income transfers might even be a necessary evil - that’s a different debate. But this is not a transfer - it is mere destruction.

\We aren’t even talking about robbing Peter to pay Paul. We are talking about robbing Peter and then throwing the money down the sewer. Paul has no more at the end of the day than he did at the beginning. We just don’t like it that Peter has more, so we penalize him so Paul can sleep at night.

Sure, but that impact ought to be as minimal as possible.

Also correct. And in both those cases, we can point to a social good that offsets the negative effect of the tax. What is the social good for revenue neutral tax increases designed to penalize investment?

We are talking about capital gains taxes. Are you advocating raising capital gains taxes for one person, but not another?

I think you are trying to do what I predicted Obama would do - deny what we are basing the debate on. If Obama’s tax increase is revenue neutral as we have accepted for the sake of the argument, then we cannot cut the secretary’s taxes from the increased revenue - there isn’t any.

Certainly Obama could raise other taxes, and I have no doubt that he will. But he has still not produced any justification for his increase in capital gains taxes, if (as he seemed to accept) such increases do not generate increased revenue for the government.

But assuming that capital gains tax increases are revenue neutral, then the analogy is this. I have three apple trees in my backyard, and they produce one bushel of apples a year. You only have one apple tree, and therefore produce one bushel a year. So the government passes a law forcing me to cut down one of my trees. Who has more apples now?

Regards,
Shodan

22

This makes sense to me. What about stock losses?

23

John Mace’s proposal makes sense to me. Tax capital gains at the same rate as ordinary income, but let people step up their cost basis each year.

In my opinion, “perception of fairness” is a valid concern. Maybe it doesn’t belong at the top of the list, but if you can get a big increase in “perception of fairness” with only a small loss in other areas, it may very well be worth it. On the other hand, a big hit just for the sake of “perception of fairness” probably isn’t worth it.

24

That’s why the LTCG rate is low, to try and do an inflation adjustment. But given that its only a year holding to get to long term, it really isn’t “fair.” (Didn’t it used to be two or three years - can’t remember which - but a year isn’t “long term.”) I’d also rather see inflation indexing, and I don’t think the tables would be that much more difficult than most tax law - particularly given the amount of bookkeeping required to buy and trade to start with.

And yes “fairness” is an important and valid concern in tax policy. The problem being that fairness is a subjective thing.

25

Another concern is that if the president pushes through a massive increase in the capital gains tax, many people will sit on their gains expecting that the increase will be repealed in a few years. It’s hard to predict what effects there might be, but there’s something to be said for leaving bad enough pretty much alone.

26

Could someone explain why a capital gains tax is revenue nuetral.

27

We are assuming it is for the purpose of the discussion - to isolate one motive from the rest.

Is the benefit of “fairness” as defined as “not allowing someone to out-earn another by some margin” enough to justify government action?

Regards,
Shodan

28

I don’t think anyone has yet mentioned it: can “fairness” here be taken to mean the same thing as “reduce the income gap”? The argument consistently made about the income gap is the “raising all boats” defense – that is, if everyone benefits monetarily from economic policy X, but the less well-to-do do not gain as much benefit as the very well-to-do, policy X is worthwhile. Personally, I find that argument to be solid, although somewhat overly simple.

But, removing the monetary impact from the discussion allows one to approach the question without that defense. Assume the net economic benefit/detriment doesn’t matter. Is eliminating a policy that promotes inequality good?

29

I realized that I should clarify a couple things about my previous post. First, when I pose the question, “can “fairness” here be taken to mean the same thing as "reduce the income gap?”, I’m not intentionally using a rhetorical device. I’m actually asking the question, as I’m not sure.

Second, while I do think that, as a general rule, “eliminating a policy that promotes inequality” is good, the determination depends heavily on the specifics. Often, it’s just better to not muck about with policy at all. Furthermore, I note that the quoted phrase is rhetorically stilted; perhaps a rephrasing is in order.

30

Fairness in tax policy can mean a lot of things.

It can mean that everyone, regardless of income, is taxed at the same proportion.

It can mean that you are taxed a greater proportion of your income if you make more money (progressive taxes like the income tax).

It can mean you are taxed more on your first dollar than your last dollar (regressive taxes like social security).
It can mean you are taxed based on what services you use. (Permits, fees, licensing are all forms of taxes. The gas tax theoretically goes to funding the roads that gas consumers drive on).

You can tax wealth. You can tax property. You can tax beards. You can give tax breaks for children or tax them. You can do a VAT or just tax the final transaction. You can tax estates - you can tax all estates or only estates worth more than X.

All of these are seen as fair by someone or another.

I don’t think that the reduction in capital gains rates will reduce the income gap. For one thing, AMT does an OK job making sure that rich people pay taxes above the capital gains rate. For another, munis aren’t taxed at all - increase the capital gains rate and investors will move to other investments. However, the perception is that rich people pay very little taxes, so it increases the perception of fairness.

(Get rid of AMT at the same time as you turn capital gains into ordinary income would be another idea - it would simplify tax code by a lot and be fairly popular with the “privileged middle class”)

31

Actually, if we are assuming a revenue neutral scenario, he doesn’t lose anything. He may not sell as many assets, but he still has them, and the wealth they represent. Now, eventually he will sell all the assets, but when he does it will not be a revenue situation any more.

I was trying to examine fairness in terms of income. Who has more than who definitely impacts government policy, whether in terms of welfare or the progressive income tax.

The investor has the the same amount of wealth, just less cash. That’s by definition - if the tax is revenue neutral, the investor is not paying the government more than before - a higher rate, yes, but not more absolutely.

Now, the benefit would be to encourage work by not having the worker discouraged by paying more for a given income than someone doing less. I don’t know about you, but when I had to pay a lot of capital gains taxes it was for doing a lot less than for an equivalent amount of income. In this scenario there would be less market churn, and thus a more stable market, which might be a social good. it might reduce venture capital - though there was plenty before the tax increase - which would hurt investment. Reducing the number of people playing the market won’t.

32

I didn’t think of a move to munis as an example of a social good, but it would be. More money in munis would decrease the interest rate which would make it cheaper for governments to borrow which provides more money for their constituents. Mrs. Heinz-Kerry puts all her money (a lot) in munis for the good of Pittsburgh and Pennsylvania.

33

The proposal under discussion does no such thing. It just gives the government more of a transaction. Any limitation on earnings comes from the revenue neutrality requirement, and wouldn’t happen in practice. It might reduce the average income gap, but not by directly limiting anyone’s income.

34

Not directly, just by de-incentivizing. I take “revenue neutral” to be referring to government taxes - a 15% tax on $1000 vs. a 30% tax on $500 is revenue neutral, for instance. By definition, if the rate goes up, the total amount subject to taxation has to go down, or the tax wouldn’t be revenue neutral.

So the proposal under discussion does exactly what we have been saying all along - it is designed to reduce earnings and calls it “fairness”.

Regards,
Shodan

35

If you are going to argue that any tax which reduces earnings cannot be fair, it is rather pointless to post here, isn’t it?

36

I wouldn’t want to step in on behalf of such a stupid man when a mental giant is dressing him down, but I would point out that what you have quoted Obama as saying is that he “would look at” the matter. I think we’ve all grown so complacent with a president who decides first and looks later that such notions as actually examining something and thinking about it before acting seem like the musing of idiots.

37

This does nothing to alter the rating of Obama as one of the most liberal politicians in the Senate.

38

Which in itself is somewhat relative and subjective wouldn’t you say?

39

Sometimes ratings say more about the raters than the ratees. And sometimes they say nothing significant at all.

National Journal’s vote ratings became an issue in the 2004 general election, when Republicans used the magazine’s ranking of John Kerry as the most liberal senator of 2003 to label the then-Democratic nominee as the “most liberal senator” – even though that was his rating for just that one year, when (like Obama did) he missed quite a few Senate votes due to being on the presidential campaign trail.

As National Journal’s editor wrote back then, “[O]ur magazine – or, more precisely, our annual congressional vote ratings edition – has become a Republican talking point in the 2004 presidential campaign. And that’s been a fascinating, and disconcerting, experience. Fascinating because we’re more used to being cited in congressional hearings than on the Today show. Disconcerting because the shorthand used to describe our ratings of Kerry and Edwards is sometimes misleading – or just plain wrong.”

Indeed, while Obama ranks as the magazine’s most liberal senator of 2007, his ranking was 16th in 2005 and 10th in 2006.

http://firstread.msnbc.msn.com/archive/2008/01/31/625886.aspx

40

Right, there is no reason why to give Capital Gains a lower rate. Remember, most Capital gains are not through true “investing” but rather from gambling on the stock market.

That’s not “investing”, like Start-up funding and such is.

BUt I aree with John Mace, I’d say if held over 5 years, you’d be eligible to adjust the basis for inflation.