TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, September 7, 2012

CTJ: Democrats' Tax Plan Is Too Republican

CTJ LogoCitizens for Tax Justice:  Tax Ideas in the Democratic Platform: Obama as Tax-Cutter-In-Chief:

In its 2012 Platform, the Democratic Party broadly calls for a tax system that asks “the wealthiest and corporations to pay their fair share,” while also taking “decisive steps to restore fiscal responsibility.” The actual policy proposals called for in the platform, however, are wholly inadequate to achieve either tax fairness or fiscal sustainability....

The Democratic Party 2012 platform reveals a party deeply committed to the anti-tax mindset that historically is associated with the Republican Party. Rather than laying out the cold, hard truth about how the US needs to raise a substantial amount of revenue to meet its commitment to future generations, the Democratic platform seems an attempt to one–up Republicans on the virtues of tax cutting by touting the wide variety of cuts Democrats already enacted, and the massive amount they plan to extend. Given the enormous need for revenue to fund public investments and eventually reduce the deficit, a record of tax-cutting should be a source of embarrassment rather than pride or celebration.

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The claim that taxes on income from investment on capital are "double taxation" is absurd.
You aren't being taxed twice on your income. You're taxed once on the wage income and then only on the new income generated by your investments, not on the principal (which would be a wealth tax).
The people who are really taxed twice or more on their incomes are the middle class, who have to pay payroll taxes (social security and medicare) on top of income taxes, and end up paying a much higher rate than the rich who pay capital gains.

And of course, many of the rich pay nothing on their investment income, thanks to the realization requirement combined with step up basis at death.

Anyone who pays income taxes, and then sales taxes is being "double taxed" as well, and of course sales taxes affect the poor and middle class far more than the rich.

What really matters is the effective tax rate (measured against gross income or adjusted gross income, NOT taxable income), which is far higher for the upper middle class than it is for billionaires.

Posted by: Anon | Sep 7, 2012 6:39:16 AM

The claim that taxes on income from investment on capital are "double taxation" is indeed absurd.

On the other hand, it's about equally misleading to think of Social Security "taxes" as double taxation, since those payments generate a direct benefit to the worker. Think of it as a 401(k) program with a match from the government: a reasonably generous one for the very lowest-paid workers, and either a mild benefit or a mild penalty for most of the middle class.

Also it isn't really helpful to count multiple different taxes generated at the same time as "double taxation". Capital gains generate federal income tax and state income tax, but we don't normally think of that as "double taxation". Same for wage income that generates federal income tax, state income tax, and Medicare tax.

"Many of the rich pay nothing on their investment income, thanks to the realization requirement" ... if it isn't realized, it isn't "income". When it's realized, it gets taxed.

As for the step up in basis at death, assets transferred at death are subject to the estate tax. Levying a tax of up to 55% on unrealized gains, and then taxing the same gains again when the heirs finally sell the assets--now THAT would be double taxation.

Paying income tax and then sales tax is "double taxation" to the same extent as taxing capital gains, I agree. Either it makes sense to think of it as double taxation in both cases or in neither. Neither, it seems to me. Thinking of the overall tax burden as a percentage of GDP, the same dollar will indeed be counted over and over again, in both GDP and overall tax.

What really matters is indeed the effective tax rate. It's often claimed that this is far higher for the upper middle class than it is for billionaires, but most of these claims are based on shockingly crude misrepresentations of the tax system. It would be interesting to see a detailed and accurate calculation doing a true comparison: the information seems very hard to get. Here are the assumptions I'd apply:
(1) ignore corporate income tax (don't count it as an extra tax on capital)
(2) ignore taxes (and "taxes") paid by other people (e.g., employer's share of Social Security "tax" and Medicare tax)
(3) offset Social Security "tax" paid by the employee by the benefit receivable by that employee for those payments (excluding benefits arising from the employer payments); if negative, count as a negative tax
(4) apply an inflation adjustment to the basis of all capital assets before calculating capital gains
(5) exclude all unrealized capital appreciation (not "income")
(6) include realized capital losses, even if not deductible in one year
(7) exclude all charitable contributions from income (including charitable contributions of over 50% of income)
(8) allow itemized deductions only to the extent they relate to expenses of income production; disallow personal exemptions, medical expenses; perhaps allow state/local income tax on wages/salary as this is normally a required expense for generating the income.

This calculation is admittedly hard to do, because most of the information isn't readily available. (Else I'd do it myself.) The usual procedure is to apply all adjustments that support your argument and to ignore all that don't, and so most published comparisons (by all sides) are junk propaganda statements.

Posted by: No-no-no | Sep 7, 2012 10:56:07 AM

Anon at 9:39, although I tend to forgive some people for arguing capital gains should not receive overly preferential treatment for high income individuals, but you provide the same incorrect debate points that many people provide.

Corporations are taxed at the corporate level on their net income. I'll refrain from discussing the slew of foreign, payroll, excise, sales, and other ad valorem taxes that companies pay but you can add that to the total tax bill of the company. Those after-tax earnings go into an account where they will be distributed and the distributed earnings incur income taxes again.

Compare that to a partnership. They pay same payroll, excise, etc. but the earnings are not taxed before they're distributed.

The real argument is whether preferential treatment drives investment and that answer is a big no. CEO's receive massive stock option plans that are taxed at capital gains and void any type of payroll tax for doing nothing than job they've always been asked to do. Investors like Romney and Buffett aren't going to care whether they get 15% less return or 20% less return as long as their is return. Investors aren't investing because of taxes, but because there's not a sufficient amount of investing opportunities for the massive amounts of cash they've been sitting on for the last 2 years. But without increased wages from the rest of us, there won't be enough for consumption. Right now, the government through student loans and banks through not restructuring the real estate market they crashed have guaranteed themselves trillions of America's income for the next 30 years while overall wages have fallen in relation to inflation.

Posted by: Dave | Sep 7, 2012 11:32:04 AM