Capital gains and Obama
Topics: Taxes
30 Oct 2007
From: Ervan Darnell
To first blush, it would seem that a lower capital gains rate is not
justified. Sure, investment is good, but so is spending. We invest to
have something to spend after all. Tipping the playing field in favor
of consumption is obviously bad, but so is tipping it toward
investment. For example, the speculative excesses of the 90's were in
some ways caused by a differential capital gains rate. If capital
speculation pays more (after taxes) than dividends, then speculative
ventures are preferred (where not economically sensible). Even without
shifting to more speculative companies, a company could stop paying any
dividends and then buy back its own stock. This has the effect of
paying dividends at a lower tax rate, but makes everything less transparent.
But taxing capital gains at the same nominal rate is not the same
effective rate. If a stock gains 5% per year and inflation is 3% and
the capital gains tax rate are 40%, then there is no actual income on
any long term gain. A situation where low savings rates and high
consumption are rational. Compare that to a 40% tax on income (if you
apply your time to a salaried job instead of thinking about
investments). You get the income and pay the tax and even if you lose
3% to inflation before you spend it, you're still ahead. Thus, a level
playing field is a lower capital gains rate. The proper capital gains
rate is about (yield - inflation) * bracket. For many investments that
will be about half the marginal rate. Thus 15% capital gains versus 28%
(a populous ordinary income bucket) is not far off.
It's a subtle but important point about making investment in new
products profitable in a fair way. It's one the Democrats do not
understand, or do not want to admit they understand:
> Barack Obama and John Edwards advocate taxing capital gains at 28%;
> Hillary Clinton favors taxing dividends at the surtaxed income-tax rates.
http://www.cato.org/pub_display.php?pub_id=8759
That's more like a 50-60% tax on capital gains
Hillary splits the difference:
> She was strongly opposed to extending the Bush tax cuts beyond 2010.
> In other words, income tax rates would rise automatically. And for
> investors, the capital gains tax rate would rise back to 20%, and the
> dividend rate to 30% or higher.
http://www.investmentu.com/IUEL/2007/20070509.html
I don't know if Bush understands this or he simply prefers a lower
capital gains rate to help his cronies. But, I'll take a good policy
for a bad reason over a bad policy for a bad reason.
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