Even though the holiday season is upon us and Congress is finally calling it quits for the year without the passage of the expected tax giveaway bill for the wealthy, the relentless campaign of conservative think tanks and trickle-down economists to cut taxes on capital gains and other investment income continues.
The Wall Street Journal's editorial pages provide two recent examples. First there was Martin Felstein's December 8 "Tell Joe It Ain't So" piece arguing for elimination of any tax on capital gains, interest or dividends. Feldstein, a Harvard professor, member of the Wall Street Journal board of contributors and former chair of the Council of Economic Advisors under President Reagan, purports to care about ordinary Joes, but his arguments apply primarily to the wealthy who can choose to save or work. His goal is clear--eliminate tax on capital and increase tax on earnings. He pays little attention to the distributional impact, especially of the proposed increased taxes on wageearners.
Next came Edward Prescott. senior monetary adviser at the Federal Reserve Bank of Minneapolis, an Arizona State professor of economics, and a 2004 Nobel laureate in economics. His December 20 Op-Ed, "Stop Messing with Federal Tax Rates," appeared to be making an argument for a stable tax system that is not changed on an annual basis, based on the importance of certainty to investors. He even acknowledged that rates must be "high enough to generate sufficient revenues, but not so high that they choke off growth." But then the article called the failure to make permanent the temporary tax cuts on capital gains and the temporary change in the taxation of dividends "unfinished business" that needs to be attended to quickly. In other words, Prescott doesn't really want Congress to follow his advice about not changing the tax law.
Prescott uses some statistical sleight of hand to claim that his push for low capital gains and dividends taxation isn't just another tax break for the rich. Why, he says, "nearly 60% of those paying capital gains taxes earn less than $50,000 a year, and 85% of capital gains taxpayers earn less than $100,000." That statistic--focusing on the fact that some capital gains are enjoyed by taxpayers in lower brackets-- says nothing about the amount of capital gains enjoyed by taxpayers in lower brackets compared to higher brackets. It disregards the enormous disparities between ordinary taxpayers with a few hundred dollars of capital gains who receive a very small benefit from the rate difference compared to wealthy taxpayers with predominantly capital income.
Like many others arguing for consumption taxation based on efficiency claims, Prescott argues that capital gains taxes are "cumbersome" because they hit at the risk-taking heart of a market economy. Entrepreneurs who "work their tails off" deserve a tax break. I find that argument unconvincing. It parallels the argument that CEOs deserve compensation packages 500 times those of ordinary workers because they are the ones that take entrepreneurial risk. Tell that to the ordinary Enron workers who lost it all when the firm went under. From a fairness perspective, we should ask why owners should receive their compensation at preferential tax rates when workers who "work their tails off for little or no compensation" have to pay higher rates. Workers are as much at the heart of new enterprises as are the capitalists that fund them. They take great risks by agreeing to work for startups with no guarantees for their futures, and they make the startups possible by doing so.
Prescott then says that the other group of wealthy are those who just "earn more money than the rest of us." (He disregards the many wealthy who just inherit their wealth.) He suggests they are doing nothing more than raising their children and pursuing their careers just like the rest of us and should not be "punished" for doing well. This is of course an argument against a progressive tax system generally rather than an argument merely for reducing tax on capital gains and dividends. He presents no reason other than encouraging entrepreneurialism (the same argument previously given) for treating the increased investment income (often from passive rather than entrepreneurial activities) of the wealthy preferentially compared to the income of the ordinary worker.
For all his concern about not talking about the "Bush tax cuts," Prescott's goal is to push forward the Bush agenda to reduce the tax on capital. He talks about small-time investors saving for retirement, light manufacturers, and hard-working couples across the street, but the true beneficiaries of the tax break he is pushing are the wealthy heiresses and millionaire corporate CEOs. The small-time investor saving for retirement already has tax-advantaged savings programs that benefit him. The light manufacturer has numerous expensing provisions to significantly reduce taxable income. The hard-working couple across the street may well find that the safety net provided by Medicare and Medicaid is no longer there when they need it because of the budget cuts made to fund, among other things, the capital gain and dividend tax break for the wealthy.
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