Posts Tagged ‘capital gains tax’

I’m no stranger to really dumb things appearing on my Facebook feed which make a mockery of anyone trying to engage in actual, rational, substantive debate about politics and current events. Usually I let them pass, but today for some reason I feel compelled to engage. So here we go!

First, we start out with a (obviously false) story:

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no… one would be rich, a great equalizer.
The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).
After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little..
The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F. As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else. To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. It could not be any simpler than that.

Well, everything else aside, all those students deserve to fail economics if they believe that Obama’s policies will lead to a uniformly universal level of wealth. Seriously. The professor should probably not be teaching anyone either, if he really thinks Obama is a socialist. He really isn’t. If you don’t believe me, ask a socialist! But this is where the fun begins. We finish with 5 of the greatest sentences we will ever read, apparently:

Remember, there IS a test coming up. The 2012 elections.

These are possibly the 5 best sentences you’ll ever read and all applicable to this experiment:
1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.
2. What one person receives without working for, another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it!
5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

OK, so let’s bust out the scotch and just take these one at a time.

  1. Well I suppose that’s true enough. Luckily no one is trying to do that! Obama has lowered taxes. True, he has proposed increasing taxes on the wealthiest Americans by letting the top level “Bush tax cuts” expire, but even this will increase taxes by a whopping 3 – 5%, and remember that were talking about marginal rates. This only applies to traditional income, by the way. Capital gains taxes will remain at their historically low levels. So if this modest increase, back to the Clinton-era tax rates (when the economy was so awful!) constitutes “legislating the wealthy out of prosperity” then we should seriously examine our definition of prosperity.
  2. This is just plainly not true. Economics is not a zero sum game. If this were true, what of “creating wealth”?
  3. Again, economics is not zero sum. If this were true, what about the bank bailouts? It turns out the government is really good at giving people free money! I presume that we’re referring to the idea that things like food stamps are just “stolen” out of the pockets of hardworking Americans by the ravenous poor, so lets assume for a minute that statement number 3 is in fact true. Now, lets assume that an employee of a bailed out bank gets a one million dollar bonus with his bailout funds. Not an outrageous assumption. Because the government can’t give someone anything it didn’t take from someone else, we’ll assume that it took that million from a foodstamp recipient. The average benefit is $4.40 per day. Thus, the government would have to take almost 623 years worth of benefits from that person to fund that bonus! That sounds way more egregious to me.
  4. OK. I think this means that you can’t increase (multiply) wealth by decreasing (dividing) it. Actually, I agree! Perhaps we should keep that in mind when we talk about austerity! Paul Ryan and Mitt Romney may want to call their offices.
  5. There just really isn’t a significant group that thinks they don’t have to work because everyone else will just take care of them. I’m sure you can point to an example or two, but that’s anecdotal, not a real chunk of the population. Like I mentioned previously, SNAP benefits average less than five dollars per day. Who needs to work when you have that! Conversely, there are folks who make more in an hour than I do in a year. Their work is clearly paying off! If they actually decided to never do anything again because their taxes may go up by a couple percent, they would be leaving a whole hell of a lot of money on the table, and would be epicly stupid.

As a final point, if we continue the story’s theme of substituting grades and money and accept the statement that the 2012 election is a test, then the only way to pass is to be rich. OK, actually that one may make sense…

Ranting over. I’ll get back to the real world now. I feel like I wasted time by writing this. Or even thinking about it. Ah, well.

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Last week I expressed my frustration that the recovery has been hampered by budget cutting for over a year. The Gravel Kraken responded with an Econ 101 lesson on GDP to highlight the fact that GDP is just a number and what matters are actual economic outcomes, not just that someone spent more money this quarter:

If the number was the most important thing to look at, and it really made all the difference, our government would just borrow a whole bunch of money, spend it, thereby increasing GDP (even if they spend it digging a hole and refilling it), and therefore ending a recession!  So, as a rule, budget cuts only “slow” the “economy” on paper.  In truth, the only thing the government can do with money that everybody else can’t is spend confident it will never run out.  The only tool a government has to end a recession is sheer willpower, projecting an illusion long enough for people to develop confidence of their own and actually do productive things.

In an economy constrained by a lack of demand, which ours most certainly is, and given that real interest rates are currently negative, I think that borrowing a whole bunch of money and spending it is exactly what the government needs to do! Now spending on digging and refilling a hole is of course silly, but we just so happen to have an infrastructure in vast need of repair, and we have a bunch of unemployed people sitting around not doing much. We could pay them to dig and refill a hole, but that’s not very useful. Repairing critical infrastructure is.

As for the “rule” that budget cuts only slow the economy on paper, that’s just ridiculous. Lets say that 11 million people get laid off from the private sector this year. That would mean 11 million people would stop (or slow down significantly) buying things. It would mean 11 million fewer customers at businesses. It would mean a lot of businesses shutting down, along with the companies whose core business was supplying them. Now lets say that those 11 million lucky duckies were federal employees, and they get laid off because Paul Ryan eliminated their jobs as part of “deficit reduction” measures, also known as budget cuts. The effect would be exactly the same, 11 million fewer customers at businesses, etc. Of course those newly jobless folks can take solace in the fact that their loss was only on paper. Perhaps they can eat the paper for dinner! It seems like this is some machination of the idea that government employees are not real people when it comes to the economy. But of course they are. They sit at real desks with real computers and they use real office supplies, all of which were purchased from companies in the private sector, produced using raw materials supplied by other companies, and shipped by guys in trucks working for still other companies. On their lunch breaks they go to real restaurants and on their way home they stop at real stores or go to real bars for happy hour. In other words, the government, and government employees, participate in the economy. If they have less money, they will not participate as much. That results in a weakened economy.

The Gravel Kraken also said this:

While the government has the capacity to add value, the fact that it spends money is little evidence of value added.  All voluntary private transactions represent value by definition because both parties saw it fit to proceed with the transaction and benefited.  When government spends there is only one voluntary party, so we do not have the assurance that there is actually value.  Also, government needs to spend money in areas that do not translate directly into production.  If the government doubles spending on its police, all of that spending is added to GDP, but does that make people better off?  It could, but it doesn’t have to.  If your town, tomorrow, doubled its police force, it would boost its GDP.  Has your economy improved?  I would be suspicious.

I agree that the government simply spending money is no guarantee of value. For example, government spending money on keeping capital gains taxes low is far less valuable to the country than spending it on critical infrastructure. I’m not entirely sure what it means that when government spends there is only one voluntary party. If the government wants to contract Lockheed Martin to build a bunch of jet fighters, Lockheed Martin could turn down the contract. They do not, because building a bunch of jet fighters is a lucrative enterprise. Similarly, if the government wants to hire you to inspect pharmaceutical plants or look out for tax evaders, you have every right to not take the job. Each of these is a voluntary transaction. The government needs or wants to do something, they are willing to spend the money required to do that thing, and you and your good buddies at Lockheed Martin are willing to take their money.

And by the way, I would be ecstatic if my town doubled its police force tomorrow. I am confident that doing so would be economically beneficial.

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Image via ThinkProgress

If you were even remotely in the proximity of the internets today, you probably heard a lot of chatter about Mitt Romney’s speech on the economy in Detroit. The picture above is from that event. Not exactly a full house.

Romney’s campaign has faced criticism about their choice of venue, and coverage of the empty seats has dominated today’s news.

As usual, the focus is on optics, not content. But the real reason to criticize Romney today? Take it away, Ezra Klein:

When Romney said he “wasn’t concerned about the very poor,” he wasn’t kidding. He’s using the policies they depend on most as a piggy bank for tax cuts…

What Romney is essentially proposing to do is finance a massive tax cut by cutting Medicaid, food stamps, housing subsidies and job training. In other words, the neediest Americans — and, to a lesser degree, federal workers — will be financing a massive tax cut…

In 2000, George W. Bush ran for president saying “I don’t think they ought to be balancing their budget on the backs of the poor.” In 2012, amidst a much worse economy, Romney is running for president saying exactly the opposite.

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Paul Krugman investigates the history of the capital gains tax rate, and looks into whether or not the arguments for the current low rates hold up to scrutiny. Spoiler Alert! They don’t:

Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation. Both claims are false.

And the economic record certainly doesn’t support the notion that superlow taxes on the superrich are the key to prosperity. During that first Clinton term, when the very rich paid much higher taxes than they do now, the economy added 11.5 million jobs, dwarfing anything achieved even during the good years of the Bush administration.

Kevin Drum goes into more detail, in a post that is well worth your time. The following chart, which I have stolen from Drum, shows the capital gains tax rate in blue, and the realized gains in red:

Drum explains:

Do you see a correlation? I don’t. What you see are two things. First, when people know rates are about to go up, they sell their assets quickly to beat the tax man and take advantage of the current rates. You can see that in 1968 and 1986. Second, capital gains skyrocket during investment booms. You can see that during the dot-com bubble of the late ’90s and the housing bubble of the aughts. When you remove those artifacts, there’s pretty much nothing left. No matter what the tax rate is, the level of capital gains pokes along at about the same rate. The same thing is true if you lag the results by five years, and you can see a similar result here, in a chart that compares capital gains rates to total investment levels in the US economy. There’s simply no correlation. All taxes have deadweight costs, and it’s likely that capital gains taxes have some impact on the economy, but all the evidence, both in the US and internationally, suggests that it’s pretty modest.

Simply put, there’s really very little evidence that an increase in the cap gains rate dis-incentivizes investing, as folks like Mitt Romney would have you believe. This makes sense if you think about it. Lets say I’ve identified an investment opportunity that will allow me to earn 100 dollars in profit. At the current cap gains rate, I’ll take home 85 dollars. Doubling the cap gains rate to 30%, I’ll take home only 70 dollars. But if I don’t make the investment because I want to avoid taxes, I’ll take home 0 dollars.

Jared Bernstein, in another good article, quotes Warren Buffet (who’s not exactly bad at investing)  making this argument:

“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

Matt Yglesias, in responding to Drum’s piece above, makes the point that the cap gains rate doesn’t exist in a vaccum, and the policy changes that come with it matter:

If we reduce taxes on investment income and increase taxes on fancy horses, the claim that the Romney family will shift money away from horses and into investments makes perfect sense. If we borrow a bunch of money in order to reduce taxes on investment income, then the behavior response of the Romney family is unclear and the net effect on the national savings rate could easily be negative. What’s more, the horse tax option doesn’t have regressive distributional consequences but the borrow-the-money option does. If you see the regressive distributional consequences as a feature rather than a bug, then of course borrow-the-money may look appealing, but if not there’s no reason to embrace it.

Drum concurs, and then gets at one of my pet peeves:

Hauling out an Economics 101 argument is almost never enough to shed much light on any public policy problem that’s controversial enough to be interesting. Will a tax cut incentivize certain behavior? Sure, probably. But how much? If the effect is small, does it get swamped by other things? And how does it compare to alternate proposals? Unless you can get halfway plausible answers to those things, you’re just being sold snake oil.

Yes! Any time you hear an argument that relies entirely (or almost entirely) on “if we raise / lower the whatever tax, then people will /will not do whatever” you should be very skeptical, because these arguments may sound convincing, but are rarely backed up by evidence. I think people have a tendency to over-attribute behavior to changes in the tax code. I’m not suggesting that changes to the tax code do not have some effect. At the margins, there probably is behavior change. Certainly for those that have the luxury to do so, changing your habits in such a way as to minimize your taxes makes sense. But the majority of people are not in that situation. Most folks do what they have to do to get by. They live where they live because it’s where their job / family / spouse / favorite sports team is, not because the property taxes are slightly lower.

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