Editore"s Note
Tilting at Windmills

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June 16, 2007
By: Kevin Drum

CATO....You know, I keep hearing that unlike, say, the Heritage Foundation, the folks at Cato are relatively honest. They've got their ideology just like the rest of us, but they aren't dishonest shills willing to torture the facts any old way that's convenient. The Social Security debate made me pretty skeptical of this notion (remember the Cato Calculator?), and stuff like this pretty much nails the coffin shut:

Politicians are circling around hedge funds like vultures. They want to raise taxes on hedge funds, maybe by treating their capital gains as normal income. Why? Because hedge funds are mysterious — do you know what they really do? — and they have a lot of money. Make billion-dollar profits, get headlines, attract taxers — it's as certain as ants at a picnic.

That's flatly untrue. Nobody wants to treat the capital gains of hedge funds as normal income. What a lot of us would like to do is treat the normal income of hedge fund managers as normal income.

If you invest your own money and earn a return, that's capital gains. If you manage other people's money and take a cut of the profits, that's management. Only in a looking glass world would these management fees have ever been treated as capital gains in the first place, and it's hardly mysterious that Democrats want to close this absurd loophole. After all, we believe in treating the normal income of the rich the same as the normal income of the rest of us. If Cato believes otherwise, I'd like to hear why.

Kevin Drum 1:17 PM Permalink | Trackbacks | Comments (60)

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Because rich people are better, silly.

Posted by: craigie on June 16, 2007 at 1:28 PM | PERMALINK

Or perhaps the tax code is actually pretty wise, since it regards money management income as "unearned" - and Dog knows nobody "earns" $500M in a year.

Posted by: craigie on June 16, 2007 at 1:30 PM | PERMALINK

Hedge funds are mysterious because the managers like it like that. I don't know for sure, but I doubt that the managers lose any management fees even if the fund loses money. Several hedge funds have become bancrupt or near bancrupt and there was talk of bailing them out. I'm not sure if that happened or how it may have been done, but the managers did not lose money.

Posted by: BearCountry on June 16, 2007 at 1:51 PM | PERMALINK

Wasn't Cato run by Stephen Moore for a while, who then graduated to run that focal point of idiocy the WSJ opinion page? I think so. These people are absolutely ideologically motivated. Tech Central Station belongs in that herd. And how about Arnold Kling, writer for Washington Times, Faux News, and TCS, who argues along with the rest of the nut cases that the bombing of Iran should happen now. I guess Liebermann is a nut case as well. It seemed like it--now he's proven it. Going off the rails.

There's a certain class of libertarians who have gone off the deep end, much larger than those who passed their marriage vows over and sleep next to a copy of Atlas Shrugged. I find it hard to believe they can honestly live with themselves, given that they claim to be motivated by reason.

It's one thing to have a doltish conservative or flaming idiotic liberal who doesn't seem to know any better. But the people at Cato should. And don't.

I can't stand them and I'd like to see more people in the public domain throwing dirt in their faces. It's well deserved.

Posted by: T.R. Elliott on June 16, 2007 at 2:05 PM | PERMALINK

If you look at

http://seattletimes.nwsource.com/html/businesstechnology/2003748715_blackstonesenate15.html

it says something very different that what you are saying. The tax legislation seems to be on hedge fund earnings and not on the managers. The Seattle Times says the Sentate proposes that hedge funds :

pay taxes as corporations instead of as partnerships beginning in 2012

Posted by: superdestroyer on June 16, 2007 at 2:09 PM | PERMALINK

On Cato's ideology (esp. with regard to long-term Social Security strategy), never forget Stuart Butler and Peter Germanis, "Achieving a 'Leninist' Strategy," Cato Journal, vol. 3 no. 2, Fall 1983, www.cato.org/pubs/journal/cj3n2/cj3n2-11.pdf.

Posted by: John Luke on June 16, 2007 at 2:16 PM | PERMALINK

superdestroyer -- Blackstone et. al. are not hedge funds; they manage funds that are in partnerships. That is one reason why their prospective IPO valuation is only (*cough*) $4.5B, although with a PE multiple is considerably higher than typical management firms. (Which has some people scratching their heads as to why.)

Posted by: has407 on June 16, 2007 at 2:29 PM | PERMALINK

Nixon taught us long time ago not to trust conservatives or Republicans.

Every few minutes somebody on the blogosphere rediscovers this simple fact.

Posted by: gregor on June 16, 2007 at 2:40 PM | PERMALINK

sorry, that "$4.5B" in my previous post should be "$34.5B".

Posted by: has407 on June 16, 2007 at 2:56 PM | PERMALINK

Yes, we need to tax Stefan more. He's Mr. Hedge Fund.

Posted by: The Taxman on June 16, 2007 at 3:00 PM | PERMALINK

Kevin:

I completely agree with the suspicion that the CATO Institute is anything but objective, fair and honest in its declarations. In fact, I consider it as much a mouthpiece for the administration as any other.

As a matter of curiosity and since you are operational in DC, could you tell me what has happened to the Wayne Madsen blog? It seems to have disappeared and I simply cannot wonder but that maybe it is because he has so often gone way out on a limb by publishing some really startling items. As an example, his piece about Bush having been sent for homosexual reprograming by his parents at one time.

Posted by: tbaum on June 16, 2007 at 3:04 PM | PERMALINK

has407 is correct, and superdestroyer is mistaken.

Hedge funds are organized as partnerships. Hedge fund managers are also organized as partnerships, so that the capital gain character of the underlying income can flow up from the hedge fund to the hedge fund manager, and then up from the hedge fund manager to the manager's owners and principals.

In the Blackstone IPO, it is the hedge fund manager that would go public, and would seek to retain its partnership (flow-through) status. However, the legislation would deny partnership (flow-through) status to any publicly-traded entity that has income "derived from ... services provided ... as an investment adviser ... or ... asset management services." Thus, the legislation would require Blackstone to pay taxes as a corporation. The underlying hedge funds, in which investors have limited partnership interests, would be unaffected (because they do not have any income derived from services).

Posted by: agent zero on June 16, 2007 at 3:16 PM | PERMALINK

Not true; I want to treat capital gains as normal income. It strikes me as being unconscionable that labor income is taxed at a lower rate than labor income.

Posted by: aphrael on June 16, 2007 at 3:17 PM | PERMALINK

aphrael's proposal would simplify the tax code, too, and might remove one time-wasting temptation from people starting start-ups (to organize as an LLC, on the off chance that they will ever become profitable and want to avoid ordinary-income taxation on those profits).

Posted by: dr2chase on June 16, 2007 at 3:46 PM | PERMALINK

I am a CPA/MBA who has spent the last 16 years working on reducing big corporations tax bills through various legal tax shelters. The government has killed 3 of the worst abusive shelters over the last 10 years which makes my job significantly less rewarding.

I am not writing this to brag or anything like that. It is more of an introduction to my main comment.

It used to be that you could either file as a corporation or a partnership. A corporation shielded your personal assets but you got double taxation. A partnership didn't pay taxes, the partners did, but it didn't shield your other assets.

(Yes, there were subchapter S corporations but they were quite small.)

Now with LLC's and LLP's it seems that people can have their cake and eat it too.

Why should an LLC be able to get virtually all of the benefits of a real corporation and still maintain the tax free aspects of a partnership?

Anyone have a decent answer?????

Posted by: neil wilson on June 16, 2007 at 4:11 PM | PERMALINK

I'd also endorse treating capital gains as income (I wouldn't have a problem retaining the capital gains exclusion from sale of a principal home). But the idea that there is something holy about wealth derived from investment of capital rather than labor or intellect is silly. Treating most capital gains as ordinary income would simplify the tax code, might well lead to an increase in investment, and would be more equitable.

Posted by: rk on June 16, 2007 at 4:31 PM | PERMALINK

Nobody wants to treat the capital gains of hedge funds as normal income.

Why not? Would a liberal make such an assertion?

Posted by: Michael7843853 G-O in 08! on June 16, 2007 at 4:33 PM | PERMALINK

Hedge funds presumably exploit market inefficiencies to make money and in the minds of Ayn Rand worshippers, represent the highest and noblest aspects of capitalistic initiative. The truth is they are only open to those with huge piles of wealth to begin with, since the minimum investment tends to be measured in hundreds of thousands or millions of dollar. So, once again, we are not talking about "free markets" as much as we are "rigged markets", where only the rich can play.

Kind of like George W. Bush getting to buy into a partial ownership of the Texas Rangers, only by getting loans from his daddy's rich friends without putting up any of his own money, then after receiving massive taxpayer subsidies to build a new stadium and parking facilities, turning around and selling his shares for $15 million. Think you and I can get a piece of that action? Fat fucking chance.

Posted by: The Conservative Deflator on June 16, 2007 at 4:38 PM | PERMALINK

Taxing hedge fund managers profits as income sounds like an excellent idea. If congress weren't on the take, an idea like that could gain some traction.

Posted by: slanted tom on June 16, 2007 at 4:59 PM | PERMALINK

The Conservative Deflator -- There is a good reason why many investment vehicles are accessible only to accredited investors (aka, "rich people"): they are essentially unregulated.

Selling to non-accredited investors is against the law; people who do it are scammers, and risk jail time if caught. While that may seem unfair to some, the rules exist to protect small investors, and they've done a reasonable--albeit not always good--job of it over the last 75 years.

Posted by: has407 on June 16, 2007 at 5:09 PM | PERMALINK

The foreign policy guys at Cato are smart, and have had many good things to say about Iraq. They wrote "Exiting Iraq" before many had decided that was a pretty good idea. Christopher Preble, who was I think the author of that book, plays well with others: you can see him collaborating with people from different ideological backgrounds at the political science meetings.

Dan Tompkins

Posted by: Dan Tompkins on June 16, 2007 at 5:12 PM | PERMALINK

The game is rigged. The deck is stacked.

Other news at 11.

Posted by: Buford on June 16, 2007 at 5:40 PM | PERMALINK

Saturday Cat Blogging?!

What? Oh, never mind.

Posted by: Anonymouse on June 16, 2007 at 5:50 PM | PERMALINK

All income should and must be treated the same. If anything. I don't really care what self-serving economists think, it's a moral issue. The money that's earned through sweat and blood should be taxed less than the money that's earned by sitting on your ass all day. This is just one more way the rich fuck everyone else over and leech off of society.

Posted by: soullite on June 16, 2007 at 6:22 PM | PERMALINK

After all, we believe in treating the normal income of the rich the same as the normal income of the rest of us.
Isn't that the worst thing about the U.S. according to republicans?

Posted by: Col Bat Guano on June 16, 2007 at 6:33 PM | PERMALINK

the time is coming when the french revolution will look like a day in the park.

Posted by: dontcallmefrancis on June 16, 2007 at 6:56 PM | PERMALINK

...Excuse me, what do they write on their 1040s? 'I didn't earn this income, someone else did, and I just stole it?'

I don't even see the rule in the tax law that allows this to work... It just seems like it's a wink and a nod that no one making under five million a year would get.

It's income. They took a fee, now it's theirs, so they should pay income tax on it like the rest of us shleps.

If they want to say it's not income - then it's gapital gains: Maybe not their capital, but it was gained.

I certainly don't get charged for capital gains that don't get realized...

Posted by: Crissa on June 16, 2007 at 7:12 PM | PERMALINK

Is there any doubt all the Republican candidates for president and at least several of the Dem candidates would bend over backward to help the rich people avoid paying any taxes on either 'normal' income or 'earned' income (whatever the difference is)?

When does the system get leveled, so 'free enterprise' can be exercised to it's fullest?

When do we get good government rather than more rigged stuff?

Posted by: MarkH on June 16, 2007 at 7:55 PM | PERMALINK
Nobody wants to treat the capital gains of hedge funds as normal income.

This is incorrect.

Some of us do, indeed, what to treat capital gains (no matter who it belongs to) as normal income.

Preferential taxation of capital gains discourages domestic investment and employment when compared to raising the same revenue in a tax system which treats capital income the same as other income (particularly, earned income from labor).

Posted by: cmdicely on June 16, 2007 at 8:11 PM | PERMALINK

cmdicely,

If you tax long term capital gains the same as income that means that the rate of return required for an investment to be worthwhile would go up. It would also require interest rates to go up and thus would increase the budget deficiets.

Punishing investment is not a good idea if you want the economy to grow.

Posted by: superdestroyer on June 16, 2007 at 8:35 PM | PERMALINK

has407:

I'm not sure whether you are being sarcastic or not, but that sure is noble of the powers that be to protect us "non-accredited" (read, non-wealthy) investors from the dangers of investing in hedge funds. The flaw in your argument is that when these investment vehicles crater, who comes to the rescue? Well, the taxpayer of course.

The Fed engineered the bail-out of LTCM in 1998. Read more about that here. As the author (a Cato scholar, by the way) points out, the Fed's actions encourage further irresponsible risk-taking and undermine legitimate efforts at economic liberalization in other countries. So, it’s just another case of “heads I win, tails you lose” for the rich man.

TCD

Posted by: The Conservative Deflator on June 16, 2007 at 8:51 PM | PERMALINK

Superdestroyer, why is "punishing investment" any worse than "punishing labor"?

To put it another way, what if the proceeds from increasing tax on capital gains were used to reduce taxes across the board?

Posted by: Robert Merkel on June 16, 2007 at 8:57 PM | PERMALINK

Robert,

Investment is done with after tax income and there is a risk associated with investment that does not exist with labor. Investment compete. The worst thing that any government can do is make government debt the best investment for people. Increasing the taxes on investment means that many investments will become unfavorable.

Saying that you want to increases taxes on investment means that you want less of it. Then the question becomes how you have an increase private sector job creation while decreasing investment.

Posted by: superdestroyer on June 16, 2007 at 9:34 PM | PERMALINK

I found definitive proof that cato's employees include among the worst liars, both in the sense of lying frequently and in the sense of lying badly, when I looked into an article someone gave me from cato about tax cuts and economic growth.

According to these the cato institute liars tax cuts provoke immediate economic growth, and tax increases decrease growth. They named several examples around 1930, 1965, 1980, etc and claimed that all such occurrences in the then current century followed the pattern. Curiously their dates were all accurate only to the decade. So I looked up the tax increases and cuts they said proved the standard republican tax argument of the past few decades.

There was a big tax cut in 1928 which they said lead to the economic boom of the 20's. This was the most laughably pathetic example. A tax cut in 1928 is responsible for a growth spurt that started right after wwI (in 1919 basically) and ended spectacularly soon after the tax cuts took effect in 1929. Another of their examples were tax increases in 1932 and 1934 which they claimed caused the great depression. In 1932 unemployment was passing 25% going in the wrong direction, but whats a couple of years when you have a point to prove?

Another example was the tax cut in the mid 60's, which was preceeded by two years of strong growth that then ended two years later.

Another example was the Reagan tax cut in 1980 or so, which actually was followed by some good growth after a significant lag.

They had another tax increase example which was preceeded by a year or two of poor growth which continued for a year or two after the tax change.

Anyhow it seemed to me that the most obvious conclusion to be drawn from their cherry picked examples was that prior to 1980 the government raised taxes when times were tough and the government needed to maintain revenues (most obviously during the depression) and that taxes were cut when times were good and the government had plenty of money. In all of the pre-1980 examples the good economic growth preceeded the tax cut or the poor growth preceeded the tax increase. After 1980 taxes were just cut all the time and we ran massive deficits.

Curiously they also only wanted to talk about five examples from an entire century of tax policy. Given that 3/5 of these (I don't remember what the fourth one was, but it was a bit murkier and could be argued either way) in reality strongly opposed their thesis. There was a solid 50 years of the century they didn't feel like talking about at all. Given their dishonesty in the rest of the article I doubt that was an accident.

Posted by: jefff on June 16, 2007 at 9:51 PM | PERMALINK

Nobody wants to treat the capital gains of hedge funds as normal income.

I do! Tax capital gains just like regular income. Make those rich bastards pay their share of the nations wealth.

Beb

Posted by: beb on June 16, 2007 at 9:54 PM | PERMALINK

The Conservative Deflator -- Not trying to be sarcastic; I think the rules protecting small investors are good and reasonable. Taxpayer bailouts and protection of hedge funds are another matter...

I agree 150% that those investing in unregulated investments deserve no protection, that "too big to fail" is little more than an excuse, and with Cato's assessment--and many others on Wall Street--that the FBNY's intervention in LTCM was unwarranted and did more harm than good.

Posted by: has407 on June 16, 2007 at 10:17 PM | PERMALINK

"Investment is done with after tax income and there is a risk associated with investment that does not exist with labor."

This statement is false.

I'll wager that the sums that gets invested on a pretax basis into traditional IRA's, 401K, 403b and other pre-tax accounts is quite sizable. These investments are not affected by capital gains taxes but the point remains that significant investments are made with pre-tax dollars. It is also true that someone that has spent money on training and education, relocation, and purchase of tools, clothing or equipment has incurred risk. Sometimes these expenses are deductible but often they are not. If their career choice doesn't work out they are unlikely to be compensated for those (after-tax) expenses. You can argue that you don't consider those costs to be worthy of consideration but you surely can't suggest that they don't represent risks.

Posted by: rk on June 16, 2007 at 10:38 PM | PERMALINK

Kevin, I disagree with your "nobody wants to" statement.

I think income from securities in general, above a certain amount per year, perhaps, should be taxed at the same level as income; after all, that's what it is.

Posted by: SocraticGadfly on June 17, 2007 at 12:17 AM | PERMALINK

superdestroyer:Here's what you're missing. Raising taxes on capital gains, would discourage a certain type of investing. Namely, speculative investing, where your profit is not coming from er...profit, but it's coming from other investors. This type of investing does not create jobs. In fact, one could argue (because really, it's true) that this type of investing leads to short-term management and the reduction of jobs.

There would be growth pains, that's for sure, as the economy adjusts to the new rules. And a lot of people who made bad public investments (Quite frankly, practically 99% of public investments out there are bad IMO) would lose money. But cry not. I never saw where they were guarenteed returns. In fact, the reason you get a portion of the profits is for the risk you've taken.

Sometimes risk doesn't pan out. Sorry. Should have been more educated and not invested in a market where you'd never have a chance of making your money back anytime soon without another sucker...errr...investor coming along and making you profit, by buying your share.

Posted by: Karmakin on June 17, 2007 at 8:01 AM | PERMALINK

By the way, I am pretty sure that the bill to close this loophole for the hedge funds is co-sponsored by Grassley(R), who, for his occasional GOP line-toeing foolishness, displays occasional common-sense skepticism of those who are trying to game the system. This is an example.

This is just a big@ss loopohole, and only the AEI/Cato-type dead-enders who see taxing rich people as a moral wrong will object to closing it. I bet enough repubs will vote for it to make it law, and with the D and R leaders of the senate finance committee pushing it, it should end up on Bush's desk.

Posted by: airron on June 17, 2007 at 10:59 AM | PERMALINK

By the way, I am pretty sure that the bill to close this loophole for the hedge funds is co-sponsored by Grassley(R), who, for his occasional GOP line-toeing foolishness, displays occasional common-sense skepticism of those who are trying to game the system. This is an example.

This is just a big@ss loopohole, and only the AEI/Cato-type dead-enders who see taxing rich people as a moral wrong will object to closing it. I bet enough repubs will vote for it to make it law, and with the D and R leaders of the senate finance committee pushing it, it should end up on Bush's desk.

Posted by: airron on June 17, 2007 at 10:59 AM | PERMALINK

God knows who you talk to. Cato always struck me as shills of the first order.

Posted by: Name on June 17, 2007 at 11:09 AM | PERMALINK

"...Raising taxes on capital gains, would discourage a certain type of investing. Namely, speculative investing, where your profit is not coming from er...profit, but it's coming from other investors. This type of investing does not create jobs. In fact, one could argue (because really, it's true) that this type of investing leads to short-term management and the reduction of jobs..."
Posted by: Karmakin on June 17, 2007 at 8:01 AM

Karmakin, I agree wholeheartedly with your analysis. Would it also be worthwhile to *lower* taxes on dividends as a means to encourage longer-term investment in addition to raising taxes on capital gains to reduce speculation?

Posted by: Doc at the Radar Station on June 17, 2007 at 12:00 PM | PERMALINK

Karmakin and Doc, you're forgetting. Jobs are created when people who own yachts hire a second person to clean them or a third escort to go with them. If you taxed wealthy people, they will lay off the yacht cleaner, at least.

It’s always amazing to me how “the economy” can be defined with no reference to the income of anyone who earns his money via a 9 to 5 job.

Posted by: JohnN on June 17, 2007 at 4:38 PM | PERMALINK

JohnH wrote: "Jobs are created when people who own yachts hire a second person to clean them or a third escort to go with them. If you taxed wealthy people, they will lay off the yacht cleaner, at least."

And then the guy laid off will go to work for whoever receives the tax funds when they are spent. The money doesn't just disappear.

Posted by: T.R. Elliott on June 17, 2007 at 4:41 PM | PERMALINK

I withdraw the suggestion that hedge fund earnings are capital gains; I didn't study that issue closely. I stand by the main point of the short blog item, which was:

"They want to raise taxes on hedge funds.[...] Why? Because hedge funds are mysterious — do you know what they really do? — and they have a lot of money. Make billion-dollar profits, get headlines, attract taxers — it’s as certain as ants at a picnic." and

"I’ve always assumed that Democratic members of Congress operate on the theory most clearly enunciated in 1990 by Sen. Barbara Mikulski (D, Md.):

'Let’s go and get it from those who’ve got it.'

There are many theories of taxation, such as Haig-Simons, the Tiebout model, and the Ramsay Principle. But I’d bet that the Mikulski Principle explains actual taxation best."

As for the claim that the Cato Institute is a "mouthpiece for the administration," give me a break. I admit to not doing careful research for a subordinate clause in my blog item. This commenter hasn't opened a newspaper or read the homepage of www.cato.org. May I suggest that anyone who believes that go to our website and read what we've written for a good 8 years now (yes, beginning in 1999) about Bush's fundamental philosophy, the war, the Patriot Act, the NSA spying, the overspending, the Federal Marriage Amendment, Padilla, Hamdi, the war on drugs, etc. etc.

Posted by: David Boaz on June 18, 2007 at 10:28 AM | PERMALINK
Investment is done with after tax income and there is a risk associated with investment that does not exist with labor.

False. Laboring isn't free in the real world even if it is in some versions of abstract economic theory; laborers face both cash costs and opportunity costs, and the rewards they hope for are speculative, as they face the risk of early termination, insolvency of the employer, etc. Labor may be more secure than some more speculative investments, but so are (e.g.) well-rated bonds.

And, yeah, the cash costs associated with getting and staying employed are also paid with after-tax income.

Investment compete.

So?

The worst thing that any government can do is make government debt the best investment for people.

I can think of many worse things government can do. But most of those aren't really relevant. But then, neither is yours: no one is suggesting that the government should make government debt the best investment for people, and you've made no argument supporting the implicit claim that taxing capital gains as normal income would do that.

Increasing the taxes on investment means that many investments will become unfavorable.

Yes, and increasing taxes on labor means that many labor opportunities will become unfavorable from the worker's side (and that investments that rely on hiring labor affected by the tax will become unfavorable from the investors side). A revenue-neutral shift of tax burden from domestic labor to domestically-held capital (which, given the scope of applicability of US income and capital gains tax, is the main effect of reapportionment of the burden between those two tax bases) makes foreign investment by US investors less attractive and investment in the US that does the most to produce jobs relatively more attractive. It shifts around which investments are attractive, but it does not make investment, as such, less attractive overall.

Saying that you want to increases taxes on investment means that you want less of it.

So does say you want higher taxes on labor. Our current policy, which places low taxes on Americans whose income comes from capital, wherever that capital is invested subsized by higher taxes on Americans who income comes from labor subsidizes American holders of capital at the cost of making it less attractive to invest in job creating investments in the US. Consequently, given that (as you note but exaggerate in your claim that labor is risk-free) capital has, as a practical matter, a higher cost of entry than labor, you subsidize current American capitalists, and punish labor so that the ability to enter the capitalist class—which relies on good returns to labor, mostly—is restricted.

A good way to make the rich richer and keep the poor poor, but a bad way to promote economic development. Taxing all income fairly would eliminate the perverse incentives of the status quo system.

Which, of course, is why the shills of the capitalist class are quick to oppose it.

Posted by: cmdicely on June 18, 2007 at 10:41 AM | PERMALINK

Boaz, you vile swine! Nice of you to drop by.

You're right about one thing. Cato is not, and has never been, a mouthpiece for the Bush Administration. Cato is actually a mouthpiece for traitorous, amoral, lying weasels who would sell their mothers into white slavery to avoid paying their share of taxes. Not the same thing at all.

Posted by: AJL on June 18, 2007 at 10:46 AM | PERMALINK

Kevin: Please don't say that "Nobody wants to treat the capital gains of hedge funds as normal income." Your other point is good, but there never was a good excuse to treat capital gains as deserving some special tax break per the rate itself, as honest commentators like Andrew Tobias are willing to point out. Sure, make an adjustment for the CPI (in which case, a person who sells shares they bought 25 years ago does even better, as they deserve to, than from merely having a lower cap. gains rate.)

PS - See the parallel discussion at
Brad DeLong

Posted by: Neil B. on June 18, 2007 at 11:28 AM | PERMALINK

The Cato Institute was utterly, thoroughly dishonest about early childhood education, in a report I once read. And the definition of amateurish, written by somebody with only a Bachelor's degree in some other field, spouting ideological crap, enormous misrepresentaions, the works. It would never have passed any kind of rigorous peer review. They started with their desired conclusion and worked their way back. So I don't believe a word they say either.

Posted by: MaxGowan on June 18, 2007 at 11:35 AM | PERMALINK

superdestroyer:

First, be careful to talk about good/bad of "increasing" (or decreasing) anything, since it depends on what it was to begin with. Also, investors already would get a tax break compared to labor even if the base tax rate was the same: they don't have to pull FICA out of their capital gains. Hence, they are already up 7.65%, or maybe 15.3%, if you imagine that the employer makes the employee eat the employer's share.

Posted by: Neil B. on June 18, 2007 at 11:38 AM | PERMALINK
Sure, make an adjustment for the CPI (in which case, a person who sells shares they bought 25 years ago does even better, as they deserve to, than from merely having a lower cap. gains rate.)

I don't see why capital deserves subsidy in that form, either. If I invest in a college education, a risky investment aimed at a later return in terms of labor income, I (might, assuming I don't make too much money) be able to offset the expense against the income I make while I'm going to school, which probably isn't that much and isn't taxed at a high rate to start with. I won't be able to offset it against the (greater and therefore subject to a higher marginal tax rate) income I earn that is the return of the investment in education later, and I certainly won't be able to do so with an adjustment for inflation.

Why the favoritism for capital?

Posted by: cmdicely on June 18, 2007 at 12:09 PM | PERMALINK

"Why the favoritism for capital?"

Why, indeed. The imposition of lesser rates of taxation on capital gains was always defended on the ground that investment was a good thing for society and ought to be encouraged. You know, a rising tide lifts all boats and all that. But with the Dow well over 13,000 and little of that gain going to wage earners, there's really no good answer to that question.

Not that this would ever provoke a moment of self-reflection in the halls of Cato or Heritage.


Posted by: Django on June 18, 2007 at 2:36 PM | PERMALINK

"I do! Tax capital gains just like regular income. Make those rich bastards pay their share of the nations wealth."

Beb,
That is a seriously uninformed and shortsighted comment. Capital gains come as a consequence of a macro beneficial activity, investment. Even the tax happy Germans saw the wisdom of encouraging that when they reduced their capital gains taxes to zero % in the late 1990's. The U.S. is already taxing capital gains at a rate higher than most every other developed country, if anything this needs to be reduced to achieve parity with other economies.

The next time you shop at Amazon, go to Jamba Juice, or get a life saving therapy from a biotech company, be thankful that the tax policy has encouraged investment in such activities.

Posted by: Jeff on June 18, 2007 at 6:05 PM | PERMALINK

BTW, the rich already pay their fair share and more of the nation's tax bill, disproportionate to say the least.

Posted by: Jeff on June 18, 2007 at 6:08 PM | PERMALINK
Capital gains come as a consequence of a macro beneficial activity, investment.

And labor income comes as a consequence of a macro-beneficial activitiy: labor.

So what? If you are an American, no matter where you invest, you pay the favorable capital gains tax rate. If you work in America, you pay the unfavorable tax on labor income. Now, what does that favorable tax treatment promtoe? Certainly not job-creating investment in the United States, whether by Americans or anyone else, since that kind of investment has any capital gains tax benefit offset by the burden (in terms of increasing market-clearing price of labor) imposed by higher taxes on labor income. Similarly, a revenue neutral shift of the burden from taxes on labor income to taxes on capital gains might discourage some investment, but it won't discourage job-creating investment in the US, since that kind of investment will see any increased burden on the capital gains side offset by a decreased burden in cost of employment imposed by labor taxes.

Posted by: cmdicely on June 18, 2007 at 6:20 PM | PERMALINK

yeah, pretty much. You generate income from long term investments, you don't pay anything beyond income tax. You generate revenue through work (salary), you pay income tax. Seems pretty fair to me.

Posted by: Jeff on June 18, 2007 at 11:26 PM | PERMALINK

cmdicely,
I was going to leave my comment at sarcastic alone but something about your note made me think twice.

Do you really believe that no investment is being made in the U.S.? What about the $12 billion in venture capital invested in U.S. companies alone over the last 4 quarters? How about the fact that we have a near full employment statistic for over 8 quarters?

Some jobs will move offshore, and it's plainly obvious why. However that is but a small slice of the total U.S. labor market and all rhetoric aside, we have fewer people living in poverty than at any other time in our history.

The so-called "working poor" have seen, as a group, wage increases that have far outstripped any other group in the last 10 years. Home ownership is at a record high, and investment in education and R&D (also called long term savings) per capita exceeds almost every other developed country.

Your arguments simply don't add up to anything convincing when the prima facie case points to a completely different outcome than you are projecting.

You see the American economy as corrupt and frail, I see it as robust and flexible. We have weathered terrorist attacks and attacks by mother nature, we have created more jobs than European politicians could dream of. We have consistently moved people out of poverty and into a middle class, which despite Democrats insistence to the contrary, is expanding and benefiting from a strong economy.

Not all is good, we still spend too much at the federal level (and expand at an alarming rate), our weak dollar is providing an artificial stimulus to exports and suffers at least a 20% drag because of the Chinese Yuan. Foreclosures in at least 3 parts of the country are alarming but no national trend has emerged. I worry about the health of our education system and whether or not it is flexible enough to accommodate future job demands.

Posted by: jeff on June 18, 2007 at 11:40 PM | PERMALINK

jeff -

Aren't we getting off track? The questions are whether private equity LLP's should pay a lower rate than corporations, and whether hedge fund managers should pay a lower rate than us working stiffs on what is, to them, nothing more than ordinary income. Regardless of how one feels about taxing investment income at a favorable rate, there's no justification for this kind of discrimination, unless one subscribes to the Leona Helmsley school of economics, i.e, only the little people pay taxes.

D.

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Posted by: Keren Llamas on April 8, 2011 at 5:57 AM | PERMALINK
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