Do you like to pay taxes?
Because if you don’t, I guess you don’t like what taxes buy: roads, defense, education, health care, retirement, farm insurance and subsidies, a clean environment and low energy prices.
So why the war on taxes?
The Republicans like tax cuts, but, let’s be honest, everyone likes tax cuts. What is disturbing is the rhetoric about how and what is taxed. Currently, further cuts to capital-gains taxes, originally passed as part of the Bush tax reform, are in the sights of GOP policymakers.
How many of you earn most, if not all, your income on capital gains? Well, given the average American has about $35,000 saved for retirement and 40 percent of Americans are not saving at all, I would guess not many.
So why lower capital gains? The standard answer is it “promotes investment.” Really?
Allow me to be a bit of an econ-speaking pedant for a moment. Economists define investment as purchases of new productive capital, things that are used to make other things: machines, software, buildings. This is generally a good thing.
The more investment, the more machines and software, more productivity, and, voilà, the economy and incomes grow, and living standards rise. So if you buy a machine, make some stuff, hire some people and then sell it, and make a little cash, there’s no reason not to get a little tax break. Problem is, capital gains also apply to qualified paper assets bought and sold in the secondary market. The only productivity gained here is moving paper from the “inbox” to the “outbox.”
Indeed, there may be a drain on the economy as the financial sector is sucking the best and brightest to fabricate complicated financial instruments.
In fact, this type of “investment” can begin to look like gambling. If you win, you pay low capital-gains rates. And, the best part is, if you lose you can write the loss off on your taxes. So our current tax code encourages this behavior.
Gee, wouldn’t that be great for earned income as well. In fact, one type of economic theory favored by conservative politicians, shows the choice of entering the workforce is dependent upon the economic environment. So, higher taxes on labor rather than capital income is a disincentive to work.
Holy cow, we solved the high unemployment-rate problem. Not really. Most families don’t have access to the level of funds required to live off capital gains, see above.
Mitt Romney and Paul Ryan want to maintain, or lower, capital-gains tax rates – who wouldn’t want to pay 15 percent – that the Bush administration knew would put the economy into serious debt, which is why they were set to expire.
Fiscally conservative Ronald Reagan would turn in his grave. True, the 1986 bill lowered earned income tax rates, but Reagan also raised the capital-gains rate to cover the losses.
Let’s stop the rhetoric and have a serious discussion about budget reform, such as the bipartisan Simpson-Bowles Commission. But commission member Ryan voted against it, and President Barack Obama selectively ignored it.
firstname.lastname@example.org Robert “Tino” Sonora is an associate professor of economics at Fort Lewis College and the director of the Office of Business and Economic Research at Fort Lewis College.