In my last post, I discussed Jon Huntsman's campaign release of programs that he would push as president.
Huntsman's tax proposals reflect the same old thinking of the right that capital should earn money tax-free while labor pays for government. And he adds to that a few twists, in that he doesn't appear to understand how basis works or the difference between a secondary market investment and an investment in an entrepreneurial enterprise.
He proposals zero taxation of capital gains and dividends. He argues that people should not have to pay 'double tax' when they sell their investments, since they paid tax on the original money that they earned and invested. And he says that zero taxation of this kind of income will create jobs, by creating more investments in businesses that create jobs.
These arguements ignore much of the reality of the markets.
First, most investments in stock are not direct investments in entrepreneurial enterprises and hence do nothing at all to make it easier for companies to afford to create jobs. Instead, they are secondary market investments--meaning that the investor is buying stock on the market from an investor who wants to get out of that particular corporate equity. Those trades between investors add not a penny to the company. They merely line the pockets of the secondary market seller.
Second, zero taxation of gains from such stock investments will especially benefit relatively short-term secondary market traders who buy shares cheap and sell whenever they have appreciated. Permitting these traders--who often are not invested for the long-term and who may even have ulterior motives (moving the stock in a direction that benefits them for other reasons than the companies' wellbeing) to have such gains from secondary market sales be tax free would incentivize shorter-term investment, contributing to market volatility.
Third, Huntsman's rationale for excluding capital gains from taxation is nonsensical. He says that the investor class paid tax on their income when they earned it and then invested that after-tax income so it is unfair to tax capital gains, since they represent a "double tax" on that earned income. This is wrong on various counts in itself.
a) the amount invested is not necessarily 'earned income' (implying income from wages that is taxed)--it is more likely, in fact, that the amount invested is an amount that was invested in something else or income from such an investment or tax-free income earned in a Roth IRA, for example. (Much of the tax-free benefit of retirement accounts accrues to the wealthiest corporate managers.) In today's system, the income from the investment would likely be taxed very lightly (at the preferential capital gains rate); once the switch was made to the system Huntsman is proposal, that income wouldn't have been taxed at all. So nontaxed income would be invested and earn more nontaxed income.
b) gains from investments do not represent the same after-tax income that was used to make the investment, so taxing those gains is not 'double taxation' of the investment amount. The amount of after-tax income invested creates a tax attribute called "basis". When the investment is sold, the gain is the amount realized in excess of basis--in other words, the basis is allowed to be returned tax free already under today's tax code, and nobody on the left or right is arguing that the gross proceeds should be taxed rather than the gain in excess of basis. So Huntsman's 'double tax' argument about after-tax investments being taxed again when realized on disposition is simply wrong. (There are some more sophisticated arguments that could be made about inflation or deflation adjustments to ensure that all of the gain taxed is a true economic gain, but in a rough-justice tax world we have long concluded that such fine-tuning isn't necessary and would be counter-productive, just as a tax on imputed income, while economically 'accurate', would be counterproductive and merely create arbitrage opportunities of phantom deductions against minimized imputed income.)
Fourth, since many capitalists live exclusively off their capital, zero taxation of capital gains and dividends will essentially leave an entire class who pay no income tax, while workers will be taxed on every dollar they earn because of the elimination of the many deductions that are designed to provide a basic standard of living before taxation sets in. That's highly burdensom taxation for workers combined with a permanent tax holiday for investors, most of whom are in the wealthy top 20% of the income distribution. That kind of tax scheme carries the current investor-class hostility to workers to its logical and dangerous conclusion. Not only would this radical right fringe make unions very difficult to form and make worker rights very difficult to enforce, but they would also place on workers the entire burden of the federal income tax. That would be a final blow to many ordinary Americans who are barely making it on stagnant wages, even with a standard deduction and personal exemption that protects them from paying income taxes (but not payroll taxes). (And yes, FICA and FUTA payroll taxes are taxes--they are exactions from the government. They are taxes with a purpose--to fund Social Security and Medicare programs that ensure (among other things) that older Americans do not live in penury and can have decent health care in their old age.)
This is somewhat paradoxical, because there is a segment of the radical right that has argued that it is "unpatriotic" for the poorest and lower-income Americans not to have to pay income tax. (It is not entirely clear whether Huntsman's proposals adopt this position as well: he argues for elimination of deductions and an 8% rate for those at the bottom. Does he mean to eliminate the standard deduction and personal exemption, the EITC and the child credits and have the poor pay a significant portion (8%) of their inadequate income? )
That argument against zero taxation for the poor doesn't hold water, since clearly there is a reason for providing a 'rough justice' zero taxation rate for those who have very little. The standard deduction and personal exemption (combined with the Earned Income Tax Credit and Child Credits) achieve this, ensuring that those at the bottom who need every penny for necessities do not have to make a choice between paying their taxes and eating or having shelter.
But the same ones who argue that the poor should have to 'have some skin in the game' of the income tax system want the wealthy whose income is primarily or even solely derived from their capital (often inherited, or earned as 'carried interest' where compensation was taxed at a much lower rate than a laborer's wages are taxed, or acquired in 'deals' because of family and political connections as in the case of George W. Bush and Richard Perry) to pay no income tax at all. So in this proposed regressive tax system, those who can least afford to pay would have to pay and those who can best afford to pay would not have to pay. That turns the standard notion of tax fairness based on 'ability to pay' upside down.
It might be worth considering why even less obviously radical-right candidates, such as Jon Huntsman, believe they must kowtow to the "investor class" and force the entire burden of the federal government on the working poor and middle class.
a) It certainly isn't because of a benefits analysis. Clearly, the investor class wouldn't have much of anything without the federal government--roads, transportation systems generally, air traffic, security, stable legal systems regarding property and contract rights, financial systems (and back up from the federal government), water (imagine this country without the federally funded dams and other projects necessary for fair water distribution), etc. are all necessary items to the investor class's wealth that are attributable in significant part to the federal government.
b) it certainly isn't because of a vulnerability analysis based on ability/inability to pay. The investor class is a particularly vulnerable and discrete minority that merits special protection. The wealthiest Americans own most of the financial assets and are the least vulnerable to hard times. They generally have more than enough for necessities and luxuries and those at the top of the class--the top one-half of 1%--have gotten so much wealthier than everybody else in these Reaganomics decades that they could lose half of what they have and still live privileged lives.
c) It certainly isn't based on a history of success in creating jobs by reducing taxes. This has been the policy in place since Nixon was president. It hasn't worked and there's no indication that it will work. Without broad-based growth that sustains a strong middle class, the economy in this country can't succeed. Stingy wages for laborers and wealth accrual solely at the top creates increasing inequality. As laborers garner less of the economy's bounty, they become more frugal and spend even less, in a vicious downward cycle.
d) It isn't even because that is the way to solve the federal deficit and debt problems. Taxing the bottom four-fifths of the income distribution while letting the wealthiest and highest income off essentially scott free (a 23% rate on their wages--unless it is paid as 'carried interest'-- and zero taxation of their much larger capital income and their carried interest compensation) would result in fiscal mayhem. On the contrary, if we taxed all income (from both labor and capital) at the ordinary income rates (as Reagan's 1986 tax reforms did) and had a reasonably strong and progressive estate tax and eliminated the cap for Social Security taxation, we could make a strong showing in reducing the deficit. Couple that with elimination of wasteful spending--especially the excess military spending and the 'bridges to nowhere' earmark. Add a dose of sound thinking about the corporate tax and about the multinational corporations' demands for federal government subsidization of their global enterprises, so that Congress eliminates needless corporate tax loopholes like the 'domestic production activities deduction', grossly accelerated depreciation, bonus depreciation, the R&D credit, the active financing exception. With that, we would be well on the road to fiscal responsibility.
e) It probably is because that is what the wealthy want. As George W. Bush said, his constituency was the 'have-mores'. The 'have-mores' are seldom content with just having more--they want it all. And these radical right policies will give it to them.