Time for the Encore
By Gerald E. Scorse
Wall Street has always
claimed that income from investments is entitled to lower taxes than other
income. As The Street sees it, investments in the market deserve tax breaks
because they grow jobs, grow companies, and boost the economy.
A tax system tied to that
belief is a major driver of rising income inequality. Congress could bend the
curve by restoring Ronald Reagan’s 1986 shock: equal taxes on income from
wealth and income from work. The idea is back and thriving. First, let’s take a
hard look at the Wall Street claim.
Billions of shares trade
hands every business day. Aside from the tiny number that raise money for the
issuing companies, it’s all white noise. With few exceptions—easy for
legislators to specify—there’s no reason for preferential taxes on investment
income.
President Reagan tacitly
admitted as much with his signature Tax Reform Act of 1986, which levied equal
taxes on capital gains, dividends and ordinary income such as wages. At
the signing ceremony, he called the bill “a sweeping victory for fairness” and
“the best job-creation program” ever to come out of Congress. Equal taxes soon
reverted to unequal, and became more so with the Bush tax cuts of 2001 and 2003
(true, new levies in 2013 did reduce the spread for the most affluent.) Today
though, Reagan’s policy is on the rebound.
In 2010, when the federal
deficit preoccupied all the Very Serious People in Washington, two bi-partisan
groups looked at ways to put the nation’s fiscal house in order. The first was
a Congressional body, President Obama’s debt commission, commonly known as
Simpson-Bowles; the second was the Bipartisan Policy Center, a top D.C. think
tank. The blueprints they drew up differed in many specifics, but in the large
not so much. Both called for lower marginal rates and a broadened tax base, the
pillars of the 1986 reform. Both broadened the base in large measure, as Reagan
did, by taxing all income at the same rates.
Three billionaires say aye,
each from a distinct vantage point.
Warren Buffett long ago
famously asked why he should pay taxes at a lower effective rate than the
secretaries in his office. The hedge fund guru Stanley Druckenmiller has spoken
out at college campuses about America’s fiscal stacking of the deck against the
young, in favor of the elderly. Tax favors for dividends and capital gains help
fuel the unfairness, Druckenmiller says.
Pimco co-founder Bill Gross
is the latest equal-tax convert; he published his epiphany in the investment
giant’s November newsletter. Gross wrote with feeling about “the plight of
labor.” He talked about his wealth having piled up on the backs of workers,
about guilt setting in. Finally, this coda: “The era of taxing ‘capital’ at
lower rates than ‘labor’ should now end.” Gross also said he had company:
Stanley Druckenmiller and Warren Buffett.
President Obama grasps the
damage being done by America’s runaway income inequality. As he said in early
December, “it challenges the very essence of who we are as a people.” It also
challenges him. The president should urge the nation toward greater equality,
and make the case for equal taxes on income from wealth and income from work.
It isn’t about
redistribution, it’s about tax fairness. Americans understand fairness, as The
Gipper well knew.
Gerald E. Scorse helped pass the bill requiring basis
reporting for capital gains. His articles on investment taxes have appeared in
newspapers across the country.
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"For stocks, mutual funds and bonds...Congress now
requires brokerages to report the basis of these investments, a reform wrought
partly after my reporting on this issue and the work of others, including
Gerald Scorse, who pressed this issue with lawmakers.” – pp. 271-2 of the David
Cay Johnston book, The Fine Print.