Conservative commentator Joe Scarborough – referencing Steve Rattner’s New York Times editorial, which calls for President Obama to raise the tax rate on capital gains to 28%, agreed that very wealthy Americans should pay more taxes on their capital gains:
You see again this huge divide between the richest Americans and the poorest Americans… and you sit there going, you know what, these people that live in these mansions and have private jets and live an extraordinary life like few Americans live — they can probably deal with a 20 percent tax rate on capital gains instead of 15 percent.
Why are we fighting and risking our majorities protecting billionaires that are hedge fund guys who are paying 14 percent tax rates?
There’s something immoral about these people paying fourteen, fifteen, sixteen percent of their taxes because the tax rates are the way they are while small business owners who make $250,000 a year in Manhattan and may employ four people are paying a 35% tax rate.”
The Washington Post’s Wonkblog also makes a strong case for raising capital gains taxes. Here are the key points:
1. Growing Wealth Inequality Hurts The Economy
The low rate on investment income has greatly contributed to crippling wealth inequality. Wealth inequality suppresses consumer demand, and has thereby resulted in recession.
The wealthiest Americans, the “investor class” who make their living off of the yield of financial instruments, such as stock dividends, as opposed to being productive. are doing very well. Joe Nocera shows this by closely examining the Forbes 400:
Last year, the cumulative net worth of the wealthiest 400 people, by Forbes’s calculation, rose by $200 billion. That compares with a 4 percent drop in median household income last year, according to the Census Bureau.
A large number of the Forbes 400 — “roughly 40 percent,” according to a group called United for a Fair Economy — inherited their wealth. Many others on the list — people who started companies that they’ve since left — are classified by Forbes as investors.
2. Low Taxes On Investments Does Not Create Economic Growth
There’s no evidence that cutting taxes on investment income has ever led to economic growth. In fact,Ronald Reagan raised taxes on investment income in the 1980s, and the economy still did very well. By contrast, George W. Bush’s capital gains cuts did not result in a good economy. Tax expert Len Burman graphed capital gains rates and economic growth, and finds no relationship at all.
3. Low Cap Gains Rates Feeds The Deficit
Burman also says that a very low capital gains rate incentivizes elaborate tax avoidance schemes:
Since ordinary income is taxed at rates up to 35 percent while long-term capital gains are taxed at a maximum rate of 15 percent, there is a 20 percent reward for every dollar that can be transformed from high-tax compensation, say, to low tax capital gains.”
Without raising the capital gains rate, it’s hard to raise taxes in a way that doesn’t also affect the upper middle class. It’s the very wealthy who pay lower taxes than the rest of us, and a capital gains tax increase is the best way to target them. That’s why the Simpson-Bowles plan eliminated the preferential rate for capital gains, whereas Romney’s plan, which leaves the capital gains rate alone, has been broadly evaluated as “mathematically impossible.”
4. It Would Encourage Productivity
Without raising the capital gains rate, math shows that marginal tax rates on the rich will need to be raised quite a bit. That raises the question: is it better to taxing their work at 45% or their investment income at 25%?