Tuesday, January 24, 2012

Capital Gains Tax Arguments

Well, south of the border Mitt Romney released his tax records.

Death and Taxes

Guess what, everybody is discussing whether or not capital gains taxes should be at a higher rate or not. Of course, we have the usual douchebag economics arguments:

  • Double taxation: corporations already pay taxes on their earnings so capital gains and/or dividends are in essence already taxed.
  • Job creation: lower taxes will foster jobs growth while higher taxes will drive away jobs.
Once again, we have kernels of truth in there, but the arguments are out of touch with the way things are working in the real world now.

Double Taxation

The concept of double taxation suggests that companies have no recourse and will be forced to pass 100% of their taxation costs to the taxpayer. Neither of these statements is true.  Companies, as they are playing on a level playing field, will all face the same situation. They will seek to maximize returns which will involve pressures on quality, prices, profitability and innovation.

Two of these forces act on consumers, one acts of economic efficiency and one acts on the shareholder. However, don't forget, consumers have the ability to invest for capital gains within a retirement plan -- problem solved. Those who aren't too rich to require a retirement plan, or won't max out their contribution limits, are able to skip right past this double taxation issue if they wish. Think about it.

Job Creation

Right now, at the current rate of corporate and capital gains taxes, companies are sitting on record amounts of cash. They have the ability to spend that cash and create jobs any time they so desire. Instead, companies are concerned about unpredictable events due to the recent global financial crisis. So, at a glance, we can see that taxes are not the primary driver of corporate investment -- its risk avoidance and ability to sell products. Give companies stable or rising demand and they will happily do business.

However, there is certainly truth in corporate tax rates concerning the ability for a company to earn higher rates of return in countries with lower corporate taxes.

Bonus Argument

However, I'd also like to tackle job creation and capital gains on another level. In the current economy we have people, or groups, with large amounts of capital engaging in speculative activities. Their investments are not as often translated into direct capital to be used by companies for growth and hiring. This role has been taken over by venture capitalists (not IPO's) at the start-up end and banks at the other.

Lowering taxes on the wealthy will simply put more money under leveraged speculative money management in a search for returns. Speculating on commodities and financial instruments is not a job creator for working class citizens.

Double Bonus Argument

This argument is likely to cause the most consternation. Those that are earning a significant portion of their income off of capital gains, as opposed to interest income, are already wealthy. They are not forced to work for a living and are simply letting their money ride here and there around the world. Sure, they take risk, but that's what professional money managers, due diligence and hedging are for.

We should lower income taxes on those that are performing labor in order to survive. Those who do not have to work should be paying higher taxes. If they are forced to actually do some paying work to raise their income, they will benefit greatly for it. Flip the advantages around. Make work pay and people will want to work. However, even if capital gains are taxed at a high rate, people will be happy to avoid work if they can still pocket a ton of cash while patting themselves on the back for being better than everyone else.

And, something that has no place in economics perhaps, think of this in moral terms. Why should we penalize people who are forced to spend their lives working. Those living the lives of leisure are very capable of bearing some of the load for the privilege of, in the majority of cases, being born into money. We, the working classes, have really had the wool pulled over our eyes by politicians under the influence of lobbyists.


I haven't put much effort into supporting my statements and yes I am certainly flying in the face of the dogma of free market capitalism. Please don't offer me the same tired old rhubarbs or political talking points -- I really do have a background in economics and I simply disagree with many of the commonly held beliefs.

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