Buffet says capital gains taxes have never scared off investors
By Gerald Scorse, Progressive Charlestown guest columnist
Conservatives have every reason to love Ronald Reagan. He cut taxes hugely on high incomes. Once a union leader, he became a ruthless union-buster. He warred endlessly against welfare.
But the darling of the Right made one sharp Left. His landmark Tax Reform Act of 1986 called for equal taxes on income from wealth and income from work.
For the first time in over 60 years,
there would be no preferential rate for capital gains. Income earned sitting by
the side of the pool would be taxed the same as income earned by cleaning the
pool.
Reagan’s equal-tax policy was bartered away in fiscal horse trades during
the Bush I and Clinton Administrations. Bringing it back for good has quietly
become a favorite Democratic position
heading into the 2020 election.
Advocates
of lower taxes on capital gains argue that they’re needed to “boost
entrepreneurship, investment and growth.” Without them, they say, America’s
dreamers wouldn’t be able to attract the seed money they need to turn big ideas
into reality.
Opponents think otherwise. Just for starters, tax
breaks on gains “give a windfall to the wealthy and make long-term budget
problems even worse.”
There’s no question that low capital gains rates lopsidedly
favor the rich. For 2019, the Tax Policy Center estimated
that more than 75 percent of the tax benefits went to those with incomes of $1
million or more. The average gain was $155,000—a big number lifted by the big
tax-rate difference between investment income and work income.
George W. Bush cut the rate on both long-term gains and
dividends to a modern-day low
of 15 percent. President Obama raised
it to 20 percent and added an Obamacare surcharge on the investment income of
high earners. Even with those increases, taxes on unearned income remain far
below the top marginal rate of 37 percent on income from work.
The Tax Policy Center also noted that having dual tax rates
was an open invitation to use “sophisticated financial techniques to convert
ordinary income…to capital gains. For top-bracket taxpayers, tax sheltering can
save up to 17 cents per dollar of income sheltered.” (Similarly, other kinks in
the tax code enabled President Trump to game
the system year after year—including paying only $750 in taxes the year he
was elected.)
Nobel economist Paul Krugman and billionaire investor Warren Buffett have their own strong views on capital gains taxes.
To Buffett
they couldn’t matter less: “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.”
The claim that tax favors on capital gains foster economic
growth is part and parcel of what Krugman calls a zombie idea, “an idea
that should have been killed by evidence but refuses to die.” Despite years of
looking, he writes,
“Nobody has ever been able to find clear evidence of a link between high-end
tax cuts and growth.”
Presidential candidate Joe Biden favors equal taxes on all
income, but with a huge asterisk: his
proposal would apply only to incomes of $1 million or more. The Reagan law
had no such threshold—and Biden shouldn’t have one either.
The
percentage of households reporting capital gains and dividends reaches well
into double figures starting with incomes of $75,000 to $100,000. For incomes
of $100,000 to $200,000, it’s already at 23.3 percent. From $500,000 to $1
million, it’s almost three-quarters.
Inequality in America isn’t really about the top 1 percent,
it’s more like the top 20
percent. Tax policies deliberately shaped to favor the Top Twenty are one
of the reasons (for chapter and verse see the Richard Reeves book Dream Hoarders.)
If Democrats take control in 2021 they should bring back
Reagan’s equal taxes on income from wealth and income from work. For
everybody, non-millionaires and millionaires alike.
This article first appeared at www.nydailynews.com. Scorse writes on taxes.