Paul L. Caron

Tuesday, May 26, 2020

Sanchirico: The Mythematics Of Capital Gains Taxation

Chris William Sanchirico (Pennsylvania), The Mythematics of Capital Gains Taxation—4 Misconceptions:

With the debate on capital gains taxation likely to heat up over the next several weeks, now might be a good time to clear up a few misconceptions concerning what the mathematics does and does not say about how investment income should be taxed.

1. Taxing investment income does not necessarily reduce investment.
The most common argument against taxing investment income is an appeal, not to some complex model, but to basic economic logic: Taxing investment reduces investment, which in turn reduces wages and employment. But that’s not what basic economic logic actually says. ...

2. The data provide no clear answer.
In principle, the outcome of that race—and so whether taxing investment increases it or decreases it—might be resolved by the careful statistical analysis of good data. In practice, the data are messy, and the question remains very open.

3. Complex model number one.
Two highly mathematical arguments appear to produce stunningly sharp outcomes out of the smoky cloud of ambiguities of the kind just mentioned. Both are problematic on close inspection. The first is the Atkinson and Stiglitz model from the mid-1970s. ...

4. Complex model number two.
Then there is the Judd model from the mid-1980s—a model that focuses on economic growth over an infinite horizon and concludes that the optimal tax rate on capital in the long-run is zero—even when the tax system is specifically designed to help those who only have labor income. There are two separate problems with the Judd model. ...

All else the same, it would be best if all taxes were zero. But when a certain amount of revenue must be raised, lowering the tax on one type of income means raising it on another. The resulting tradeoffs are still only roughly understood. So while it is good to be skeptical of the way things seem, it is also good to be suspicious of the pat-answer outputs of opaque models.

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"Let's deep six this labor v capital debate...and tax all income the same." Amen, amen: equal taxes on income from wealth and income from work. (We had this for a short time after the Tax Reform Act of 1986, passed under president Ronald Reagan.)

Posted by: Gerald Scorse | May 30, 2020 12:46:29 PM

Because it will be impossible to answer this debate empirically, life is messy, my vote would be for simplicity. The IRS long ago lost whatever ability it had to enforce an increasingly complicated tax code, e.g., look at Apple's effective tax rate even after tax reform. Let's deep six this labor v capital debate, which is as old as Cain and Able, and tax all income the same.Once we eliminate this complexity, we can then focus on the tax rates.

Posted by: Dale Spradling | May 27, 2020 5:46:43 AM