Paul L. Caron
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Sunday, August 21, 2011

Stewart: It's Time to Equalize Capital Gain and Ordinary Income Tax Rates

New York Times, Questioning the Dogma of Tax Rates, by James B. Stewart:

The issue of tax loopholes for the rich has been simmering for months, but boiled up again this week after Mr. Buffett, the famed investor and Berkshire Hathaway chief executive, called for higher taxes for the wealthy in an Op-Ed column in The New York Times. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” he wrote.

President Obama has been making a similar argument, and has made the “carried interest” exemption from ordinary income rates, which benefits hedge fund and private equity managers, the centerpiece of his tax campaign. “How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries? It’s not fair. It’s not right,” the president said a few weeks ago. ...

Proponents of lower — even zero — capital gains rates have some academic research and statistics to support their claims. Still, there’s no doubt that the root of the problem highlighted by Mr. Buffett is the disparity between tax rates on capital gains and ordinary income. Were these rates the same, the debate over how to treat carried interest would vanish, along with much of the disparity between tax rates for the rich and people like Mr. Buffett’s secretary.

Is that so unthinkable? It does seem intuitive that lower taxes and thus potentially greater rewards would encourage risk-taking and investment, and surely at some rate high taxes can discourage any endeavor. But even some hedge fund and private equity officials concede that the argument for lower capital gains rates rests more on faith than science. “I’ve seen study after study that says lower capital gains rates have no impact on behavior,” the hedge fund official told me.

That view is also backed by a growing amount of academic research questioning the premise that lower capital gains rates promote growth. The evidence “is murky, at best,” said Leonard E. Burman, the Daniel Patrick Moynihan professor at the Maxwell School of Syracuse University. ... Whatever benefits lower capital gains rates might generate, they indisputably complicate the tax code and have spawned a multibillion-dollar industry in tax avoidance. “Every imaginable individual income tax shelter is driven by the differential,” Mr. Burman noted. He added that the tax code was needlessly complex. “Have you looked at the alternate rate schedule on the back of Schedule D? It’s so complicated. It’s insane. That alone is a really good argument for change.”

In the end, the most compelling argument for equalizing tax rates on capital gains and ordinary income may not be economic efficiency, growth incentives, higher tax revenue or reducing the deficit. It’s simple fairness. It’s hard to quantify or put a dollar value on a just society. “I’ve earned both, and in my experience earning income from capital gains is a lot easier than earning ordinary income,” Mr. Burman said. “Why not tax both at the same rate? It only seems fair.”

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Comments

>“Why not tax both at the same rate? It only seems fair.”

Sure, let's lower the top income tax bracket to match the rate on capital gains.

Posted by: Ryan | Aug 21, 2011 8:36:47 AM

Fairness? Yes, fairness is good. Let's all pay taxes at the same rate. That is fairness. Why penalize the producers who in addition to paying higher AGI contribute dramatically more indirect tax revenue to society because of their productivity. When our punitive tax code drives business to leave the US and relocate to tax friendly countries, we lose far more than their corporate tax rate income...we lose the tax revenue of all their employees and all their employees sales tax revenues and housing tax revenues, etc. High taxes will alway result in less tax revenue. Its simple math. The facts are crystal clear, not "murky" as the academics of lala land suggest. Like most super rich Buffett doesn't pay taxes at the highest rate. Statistically the top 400 wealthiest Americans pay less that 15% of what they make. He's no different. He pays accountants to find and structure a return that lowers his rate to percentage levels that are less than most people who earn 100k. The only thing preventing him from paying a higher tax rate is his decision not to. He can certainly afford to...whether coddled or not. He is simply hypocritical.

Posted by: Tyler | Aug 22, 2011 3:24:05 AM

Are there studies showing that higher tax rates promote greater production of goods and services and raise our standard of living?

Posted by: Bob Guzzardi | Aug 22, 2011 4:49:47 AM

Interesting quotes:
"Everyone is entitled to his own opinion, but not his own facts.
Daniel Patrick Moynihan

The liberal left can be as rigid and destructive as any force in American life.
Daniel Patrick Moynihan "

Posted by: Paul | Aug 22, 2011 8:17:23 AM

A great idea. Unfortunately, capital gains are more sacred than the Sabbath for most people.

Posted by: Matt | Aug 22, 2011 10:22:28 AM

I strongly disagree with Ryan. First, what is the evidence that higher tax rate always results in less revenue? The only time in the last four decades the US had a balanced budget and even surplus was when tax rates were higher, prior to the nonsensical and disastrous Bush tax plans. By your reasoning, we should abolish all taxes. Then the US treasury would really overflow with money. Secondly, why call Buffett hypocritical? He is the only truly rich person to call for fair taxing of the rich. Why should a physician pay the maximum marginal tax rate working long and unpredictable hours, saving one life after another, while hedge fund and private equity managers pay a much lower rate shuffling money around just transferring wealth? Where is the fairness in that? Or should we push for a law to charge all hedge fund managers 2/20 for all services provided to them and get special carry interest tax on such proceeds? For example, if a doctor saves a hedge fund manager's life, instead of getting paid by Medicare, which many rich people decry as ineffective and want to abolish anyways, the fund manager pays 2% of his net worth and 20% of all his futue yearly income to the physician.
If anyone is hypocritical, it is people like Ryan who want to enjoy the benefits a stable society provides but refuse to pay their FAIR share in maintaining its stability and growth. Very typical of the grasshopper generation. Buffett is one of the last people to exemplify the spirit of the Greatest Generation.

Posted by: Andrew | Aug 23, 2011 12:52:13 AM