CUT Capital Gains Tax Rate To Boost Government Revenue
If President Obama and Congress want more tax revenue as part of a deal to avoid the fiscal cliff, they should consider cutting the capital gains tax rate.
Since 1981, every four-year period after the capital gains tax rate was reduced saw an increase in the amount of capital gains revenue the government received.
President Obama not only insists that the Bush tax cuts expire for the top 2% of income earners, he wants a hike in the capital gains rate to 20% from 15%.
With other changes, including a new 3.8% ObamaCare-Medicare tax on investment income, the effective top capital gains tax rate will rise to 25%.
"Raising the capital gains rate will most likely reduce revenue," said Will McBride, chief economist at the conservative Tax Foundation. "That's based on a long history of capital gains changes since World War II."
Cap Gains Tax Hike Backfires
The one time the capital gains tax rate was increased since 1981 was in 1987, from 20% to 28%. From 1987-90, capital gains revenue fell from $33.7 billion to $27.8 billion, with an average annual decline of -12.8%.
Capital gains tax rates were cut from 28% to 20% in 1981, again from 28% to 20% in 1997, and from 20% to 15% in 2003. Capital gains tax revenues grew by an annual average of 15.8% from 1981-84, 17.8% from 1997-2000, and 25.5% from 2003-06.
"One of the worst things you can tax is capital formation," said McBride. "When you increase the capital gains rate, you increase the tax on using equities to finance investing."
When the capital gains rate was reduced from 20% to 15% in 2003, capital gains revenue grew about $2 billion from 2002. In 2004, when the 15% rate was in effect for a full year, capital gains revenue rose to $73 billion, a nearly $22 billion increase from 2003. Capital gains revenue continued to rise, peaking at $137 billion in 2007. From 2003-07, the U.S. government collected about $155 billion more in capital gains revenue than the Congressional Budget Office had predicted.
Going back further than 1981 shows a similar effect. From 1968-76, the capital gains rate rose each year, going from 25% to 39.875%. During that period, the average annual growth rate in cap ital gains taxes was 9.8%. From 1954-67, the capital gains rate stayed at 25% every year. Average annual growth during that span was a more-robust 14.1%.
Raising capital gains rates isn't just a loser for the federal budget.
"It's a bigger loser for the private economy," said McBride. "Our simulations find that by far and away, the biggest danger to the economy in the fiscal cliff is an increase in the capital gains and dividend rate."
Obama would also hike the tax rate on dividends by taxing them as regular income as they were before the Bush tax cuts. That would increase the top rate on dividends from 15% to 39.5%. With the ObamaCare tax and other changes, the payout tax rate would nearly triple to 44.6%.
The Tax Foundation modeled the impact of letting all the Bush tax cuts expire, not just for those in the top 2%. That would reduce GDP by more than 9% over 10 years with nearly two-thirds of that due to the higher investment tax rates. Those hikes would reduce federal revenues by about $158 billion over 10 years.
'Fairness' Vs. Finances
Despite the evidence, neither Obama nor congressional Republicans are proposing to cut the current capital gains tax rate as part of a fiscal cliff deal.
Obama is committed to the rich paying more as a matter of "fairness." In a 2008 debate, he said he'd raise the capital gains rate "for purposes of fairness" even when the moderator noted that such cuts had increased revenue.
Meanwhile, GOP lawmakers being hammered as the party of the rich aren't eager to propose a capital gains tax cut.
Profiting From a Child’s Illiteracy
Kristof of the NYT has an epiphany about the ill effects of welfare payments:
THIS is what poverty sometimes looks like in America: parents here in Appalachian hill country pulling their children out of literacy classes. Moms and dads fear that if kids learn to read, they are less likely to qualify for a monthly check for having an intellectual disability.
Many people in hillside mobile homes here are poor and desperate, and a $698 monthly check per child from the Supplemental Security Income program goes a long way — and those checks continue until the child turns 18.
“The kids get taken out of the program because the parents are going to lose the check,” said Billie Oaks, who runs a literacy program here in Breathitt County, a poor part of Kentucky. “It’s heartbreaking.”
This is painful for a liberal to admit, but conservatives have a point when they suggest that America’s safety net can sometimes entangle people in a soul-crushing dependency. Our poverty programs do rescue many people, but other times they backfire.
Some young people here don’t join the military (a traditional escape route for poor, rural Americans) because it’s easier to rely on food stamps and disability payments.
Antipoverty programs also discourage marriage: In a means-tested program like S.S.I., a woman raising a child may receive a bigger check if she refrains from marrying that hard-working guy she likes. Yet marriage is one of the best forces to blunt poverty. In married couple households only one child in 10 grows up in poverty, while almost half do in single-mother households.
Most wrenching of all are the parents who think it’s best if a child stays illiterate, because then the family may be able to claim a disability check each month.
“One of the ways you get on this program is having problems in school,” notes Richard V. Burkhauser, a Cornell University economist who co-wrote a book last year about these disability programs. “If you do better in school, you threaten the income of the parents. It’s a terrible incentive.”
About four decades ago, most of the children S.S.I. covered had severe physical handicaps or mental retardation that made it difficult for parents to hold jobs — about 1 percent of all poor children. But now 55 percent of the disabilities it covers are fuzzier intellectual disabilities short of mental retardation, where the diagnosis is less clear-cut. More than 1.2 million children across America — a full 8 percent of all low-income children — are now enrolled in S.S.I. as disabled, at an annual cost of more than $9 billion.
That is a burden on taxpayers, of course, but it can be even worse for children whose families have a huge stake in their failing in school. Those kids may never recover: a 2009 study found that nearly two-thirds of these children make the transition at age 18 into S.S.I. for the adult disabled. They may never hold a job in their entire lives and are condemned to a life of poverty on the dole — and that’s the outcome of a program intended to fight poverty.
THERE’S no doubt that some families with seriously disabled children receive a lifeline from S.S.I. But the bottom line is that we shouldn’t try to fight poverty with a program that sometimes perpetuates it.
A local school district official, Melanie Stevens, puts it this way: “The greatest challenge we face as educators is how to break that dependency on government. In second grade, they have a dream. In seventh grade, they have a plan.”
Democrats' Assault on Language
For months, pundits and politicians have been saying that Americans have a math problem. They have a point, for Mr. Obama routinely champions the idea that running annual deficits in excess of $1 trillion dollars can be continued, simply by requiring Americans to pay $200 billion in taxes more each year. Anyone with a 3rd grade grasp of math has long ago come to the conclusion that even if Mr. Obama gets his way, huge annual deficits will remain, and the nation cannot sustain the current level of profligate spending indefinitely. Somehow, contrary to all known mathematics principles, and contrary to all common sense, in the mind of our president, the math works.
Now, even our language is under assault. Americans are no longer arguing about increasingly misleading and dodgy ways to represent the budget numbers, but are now battling over the meaning of the words being used by both sides in these arguments.
Consider Mr. Obama’s primary contention that the millionaires and billionaires (defined, without any sense of irony, as those making $250,000 a year) need to pay “just a little bit more” in taxes. The president contends that raising taxes to 39% on the top 2% will generate $1.6 trillion dollars over 10 years with no adverse effects to job growth.
* Barack Obama, has said "We can make another trillion or trillion-two, and ask for the wealthy to pay a little bit more."
* Harry Reid, Senate Majority Leader, has said: "people making all this money have to contribute a little bit more,"
* Dick Durbin, Senate Majority Whip, has said; "let the tax rates go up to 39 percent", that's it's okay for the wealthy to pay "just a bit more".
* According to Sen. Patty Murray (D-WA), "At a time when middle class families continue to struggle, it’s only fair to call on the wealthiest Americans to pay just a bit more toward their fair share,” Murray said after the vote".
* Peter Orszag (former head of OMB) claims: calling for the wealthy to pay "just a bit more" in order to achieve needed compromise on taxes and debt, is a reasonable and moderate approach.
However, in the Democrat's lexicon, what constitutes "just a bit more" changes dramatically when referring to calls for cuts of $400 billion in entitlement reform. Suddenly, much smaller calls for cuts of $400 billion are defined as imprudent "hacking away", "a gusher" and "hemorrhaging.", Yet, the president's plan to raise $1.6 trillion (or about 4 times that amount) in new taxes are described as “just a little bit.”
Remember the Paul Ryan Budget that called for $1.4 trillion in cuts to Medicaid? That plan was quickly called a "draconian", effort to punish the poor and elderly. If $1.6 trillion is defined by Mr. Obama as “just a little bit”, how then can a smaller number be defined as a draconian slash designed to punish? But, all of this, Mr. Obama tells us, is in the pursuit of a “balanced approach”.
Words do matter, and according to Socrates' Law of Identity, A=A. Or, as John Stuart Mill explains: "Whatever is true in one form of words, is true in every other form of words, which conveys the same meaning". So, if 1.6 trillion dollars is "gouging" and "draconian" when talking about entitlement spending cuts, then $1.6 trillion dollars is "gouging" and "draconian" when talking about tax increases.
We seem to have reached a sad impasse: even before members of Congress can agree on a course of action to avert the fiscal cliff, they need to agree on what words they use.
During the last election, Democrats proved their ability to inflame and to misdirect attention away from the president's failed policies, while obfuscating the very real financial crisis our country is facing. Inciting class warfare and racial tensions with the careful use of loaded words has become a Democrat stock in trade whenever there are difficult policy decisions to be made. The question is: how can Republicans negotiate with Democrats when the two parties clearly speak different languages?
Taxing the Poor
With all the talk about taxing the rich, we hear very little talk about taxing the poor. Yet the marginal tax rate on someone living in poverty can sometimes be higher than the marginal tax rate on millionaires.
While it is true that nearly half the households in the country pay no income tax at all, the apparently simple word "tax" has many complications that can be a challenge for even professional economists to untangle.
If you define a tax as only those things that the government chooses to call a tax, you get a radically different picture from what you get when you say, "If it looks like a tax, acts like a tax and takes away your resources like a tax, then it's a tax."
One of the biggest, and one of the oldest, taxes in this latter sense is inflation. Governments have stolen their people's resources this way, not just for centuries, but for thousands of years.
Hyperinflation can take virtually your entire life's savings, without the government having to bother raising the official tax rate at all. The Weimar Republic in Germany in the 1920s had thousands of printing presses turning out vast amounts of money, which the government could then spend to pay for whatever it wanted to pay for.
Of course, prices skyrocketed with vastly more money in circulation. Many people's life savings would not buy a loaf of bread. For all practical purposes, they had been robbed, big time.
A rising demagogue coined the phrase "starving billionaires," because even a billion Deutschmarks was not enough to feed your family. That demagogue was Adolf Hitler, and the public's loss of faith in their irresponsible government may well have contributed toward his Nazi movement's growth.
Most inflation does not reach that level, but the government can quietly steal a lot of your wealth with much lower rates of inflation. For example a $100 bill at the end of the 20th century would buy less than a $20 bill would buy in 1960.
If you put $1,000 in your piggy bank in 1960 and took it out to spend in 2000, you would discover that your money had, over time, lost 80 percent of its value.
Despite all the political rhetoric today about how nobody's taxes will be raised, except for "the rich," inflation transfers a percentage of everybody's wealth to a government that expands the money supply. Moreover, inflation takes the same percentage from the poorest person in the country as it does from the richest.
That's not all. Income taxes only transfer money from your current income to the government, but it does not touch whatever money you may have saved over the years. With inflation, the government takes the same cut out of both.
It is bad enough when the poorest have to turn over the same share of their assets to the government as the richest do, but it is grotesque when the government puts a bigger bite on the poorest. This can happen because the rich can more easily convert their assets from money into things like real estate, gold or other assets whose value rises with inflation. But a welfare mother is unlikely to be able to buy real estate or gold. She can put a few dollars aside in a jar somewhere. But wherever she may hide it, inflation can steal value from it without having to lay a hand on it.
No wonder the Federal Reserve uses fancy words like "quantitative easing," instead of saying in plain English that they are essentially just printing more money.
The biggest and most deadly "tax" rate on the poor comes from a loss of various welfare state benefits-- food stamps, housing subsidies and the like-- if their income goes up.
Someone who is trying to climb out of poverty by working their way up can easily reach a point where a $10,000 increase in pay can cost them $15,000 in lost benefits that they no longer qualify for. That amounts to a marginal tax rate of 150 percent-- far more than millionaires pay. Some government policies help some people at the expense of other people. But some policies can hurt welfare recipients, the taxpayers and others, all at the same time, even though in different ways.
Why? Because we are too easily impressed by lofty political rhetoric and too little interested in the reality behind the words.
For more blog postings from me, see TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH, POLITICAL CORRECTNESS WATCH, FOOD & HEALTH SKEPTIC, AUSTRALIAN POLITICS, IMMIGRATION WATCH INTERNATIONAL, EYE ON BRITAIN and Paralipomena . GUN WATCH is now put together by Dean Weingarten.
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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)