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So Mitt Romney wants to exempt capital gains from taxation — but only for taxpayers who earn less than $200,000 a year. In Tuesday night’s debate, Newt Gingrich asked him (I’m paraphrasing) “Why the cap?”. Romney’s answer — that he’s looking out for the middle class because “the rich can take care of themselves” — was as incoherent as anything I’ve heard this election year.
Here’s why:
I interpret Romney’s answer to mean that he wants to cut capital gains rates not on efficiency grounds, not on supply side grounds, and not on philosophical grounds, but on redistributionist grounds. Well, okay, I myself don’t think very much of redistribution as a primary driver of tax policy, but Romney and I can disagree on that one. But where the incoherence comes in is this: If your goal is to redistribute from the rich to the middle class, why on earth would you do it by cutting the capital gains tax, as opposed to lowering income tax rates in the middle and raising them at the top?
To put this another way: If you care about efficiency, you’ll want to cut the capital gains rate to zero for everyone. If you care about fairness, and if you believe fairness mitigates against double/triple/quadruple taxation, you’ll still want to cut the capital gains rate to zero for everyone. If you care about redistribution, you’ll want to juggle the tax brackets. But I can’t think of a single thing you could care about that would lead you to laser in on cutting capital gains rates for middle income taxpayers only.
Now it might be that somewhere in Romney’s 59 point economic plan there’s an answer to this. If so, Herman Cain was surely right when he intimated that Romney himself can’t be terribly familiar with the contents of that plan. Because, when asked a simple question about the justification, Romney wasn’t able to come anywhere close to making sense.
I’m guessing that an honest answer would have been something along the lines of “I wanted something that would sound good to Republican primary voters who aren’t paying too much attention to the details, and I knew that the phrase `capital gains cut` was like red meat to a lot of those guys, so I threw it in”.
If the Republicans want a nominee who will pander to the left, right and middle with no coherent philosophy and no coherent policy proposals, why not just drag out Bob Dole? At this rare historical moment when the country just might be willing to take a flyer on some truly radical changes, it saddens me deeply that warmed-over Dole might be the best the Republicans can manage to dish up.
Of all of the candidates in the running for the GOP nod, do you have a dog in the hunt? Who, if any, makes the most sense when talking economics?
And on a related note, could you offer your opinion on the 9-9-9 plan? (Even though it has a roughly 0% chance of ever passing through legislature.)
IMO they should simple make it so a person can put as much as want into an IRA. Allow people to take as much as they want out of their IRA at any time but tax all withdrawals. Maybe allow them to rent their own home and car from their IRA at market rates. That would make a progressive consumption tax. You would also want to end the Corporate profits tax.
“To put this another way: If you care about efficiency, you’ll want to cut the capital gains rate to zero for everyone. If you care about fairness, and if you believe fairness mitigates against double/triple/quadruple taxation, you’ll still want to cut the capital gains rate to zero for everyone. If you care about redistribution, you’ll want to juggle the tax brackets. But I can’t think of a single thing you could care about that would lead you to laser in on cutting capital gains rates for middle income taxpayers only.”
It seems you are leaving out a lot of possibilities. Maybe Mitt Romney is a deontologist who believes that the capacity for rich people to get rich by investing money without being double-taxed is intrinsically evil. But overlaid on that sense is the a mild belief in efficiency / fairness.
I agree that’s not exactly what he said, but it’s also not ruled out by what he said, if I remember correctly.
Why don’t you think much of tax policy on redistributionist grounds? A more equal society might be a happier society.
Maybe Romney wants to tax the currently rich especially. A raised income tax will hit the future rich people more than the currently rich, since the currently rich get most of their income through capital gains. Actually, if his goal is to redistribute wealth, doesn’t it make sense? The ones who save up are more wealthy than the ones who spend the money, and should therefore be taxed more, which is what the capital gains tax does.
@Jonatan: I agree, a more equal society would be happier. This is why I think the beautiful should be forced to sleep around more, and the idle to mow lawns for the busy. Beauty and leisure are good things, and they are not distributed equally in our society. Occupy Plato’s Retreat!
@Jonatan: Oh, and dibs on Salma Hayek.
Five thoughts:
1. Here we go again, I’m thinking. Landsburg wants to make some point about economics, so he’s being intentionally obtuse about why politicians don’t espouse his pet theories. I’m already composing an ill-tempered rejoinder in my head as I click on “Continue Reading ‘Why Not Bob Dole?’” And lo, there it is:
Curses, foiled again.
2. For what it’s worth, I haven’t found any fault with Landsburg’s arguments about the relative efficiency of focusing our revenue/redistributionist policies in an income/consumption tax rather than a capital gains tax. Maybe there’s an argument to be made about ease of administration or something; dunno.
But in analyzing his own X Tas proposal, David Bradford began expressing concerns about the cost of transitioning from one tax regime to another. Among the distorting effects of a capital gains tax is that it causes people to make decisions on the basis of sunk costs, which the tax code regards as “basis.” People make investments based on the assumption that they are gaining a value tax attribute in their basis. If we stop taxing capital gains (and compensate with a higher income/consumption tax), people with capital assets will lose the value of their basis.
Would that be a big deal? I haven’t really noodled it through.
3.
The last rare historical moment in which the country was willing to take a flyer on some truly radical changes, we got the New Deal. Given similar inputs, I’d expect similar outputs.
4. Why do Americans “take a flyer” but Britains “take a flutter”?
5. Finally, check out The New Republic‘s story, The Un-Believer (mostly gated). No, I’m not going to tell you what it’s about.
I’m curious about this as well. Does Landsburg mean that he opposes redistribution? Or that he thinks that there are better ways to achieve redistribution than via the tax code? And if the latter, what mechanisms does he favor?
Eliminate capital gains and include it as ordinary earned income. Eliminate corp income tax and “pass through” all income to the owners/stockholders and count it is ordinary earned income. Those two changes dramatically shake up the corp world as they lose the ability to conceal information about what they pay people behind tax dodges of various types. With no corp income tax, major reasons for costs business “go away”–because the “tax” reason no longer exists.
Maybe have an annual “tax free” amount from ALL sources of capital gains per person per year–say $5k. Or raise/adjust the personal income tax tables to reflect the higher non-taxable income level.
Maybe Romney cares about fairness, as perceived by voters, and not by academic economists.
Romney has always been a carpetbagger with ethics that are as flexible as Gumby. The fact that he can’t seem to get his poll numbers with likely voters above about 25% no matter how the field of alternatives changes makes me think at least a majority of Republicans have figured this out.
That said, they hate Obama so much that Mitt is almost certainly going to be the last man standing in the Vote “Not Obama” race.
The saddest part is that I’d love to vote Not Obama but I’m even less likely to get a choice I would accept than the Republicans are.
Roger:
Maybe Romney cares about fairness, as perceived by voters, and not by academic economists.
But that quite ignores my question: If that’s what he cares about, why not adjust income tax rates accordingly rather than focus on capital gains?
“But I can’t think of a single thing you could care about that would lead you to laser in on cutting capital gains rates for middle income taxpayers only.” Well I can. You want to increase the middle class’s sense of having a stake in the market because you think that will foster better policies in the future.
I don’t for a moment belive this is what Romney is thinking. He is thinking more along the lines “I want to promise a tax cut popular with primary voters but I better toss in that cap or Obama will demagogue me and I’ll be crucified for tax cuts for the rich and I just don’t want that hassle.”
Is it possible he thinks that capital gains taxes should be zero for everyone, but it’s politically harmful to do so for the rich?
However, eliminating the tax for as many people as possible is still a positive, is it not?
Bob Dole’s still alive?
Socialists don’t like dividing the money into two groups (capital gains versus income). After all, it is all money. You talk with those people about economic efficiency and they look at you like you’re from the Matrix.
In fairness to socialists, they correctly note that “capital gains” is often money that was in some sense “earned” (what does Warren Buffet do for a living?) and in many cases built around a base that was never “saved” (hello private equity companies).
@KenB: man, i’ve been saying the same thing for years. i work a lot of hours to make extra money (at least 60/week for 20 years). the donks always want to take some of my money to equalize things. but they never suggest taking some of the spare time from the slugs of society. for some reason the socialists are only concerned with equalizing money.
@Ken B
It might be even better for the society if we could redistribute those things. But it’s probably not practical. On the other hand it might be practical to redistribute wealth. That is, the cost of redistribution of wealth might be worth it for the gains. That there are other aspects for life for which this is not the case, is not a strong counter-argument.
One of the big problems with zero rated capital gains is passing earned income as capital, as has been mentioned above. If you zero rate capital gains, the wealthy will pay lots of money to get all their income passed as capital. The moderate earners may not be able to do this. Is it the case that “capital” income from those earning less than $200,000 a year is actually more likely to be genuine capital income (interest from savings acounts perhaps), whereas higher earners are disguising their earned income as capital (managing hedge funds or companies, for example).
As I understand it, it is because really rich people have much more capital gains then income. Probably the really rich don’t even have income and only capital gains. If you are going to redistribute, then you need to tax capital gains as well.
T.
@Jonatan: Of course it’s practical, simply institute a tax in lieu of services. Thus the beautiful are offered the choice to put out or pay up, the idle to pitch in or fork over.
To what extent is redistribution of money analogous to redistribution of other desirable attributes? In particular, does the idea of state-imposed redistribution of sex turn your stomach? Consider:
For more, see the post here and the ensuring discussion.
@nobody.really: It’s a minor point but you quoted this bit of obscurantist bafflegab:
“[C]onceiving of sex as if it were money, and women were wealthy people — the transactional model of sex — is extremely problematic. That kind of thinking is not only inaccurate, it creates a set of myths that does a lot of harm to women and to men.” It’s bafflegab because one is not “conceiving” one is applying consistently the ONLY CRITERIA WE EVER USE FOR WEALTH which is how much people want it. It’s also scolding in place of argument; no inaccuracy is identified but harm is alleged. This is very sleazy stuff. However *MY* hypothetical is pure since it posits a sex tax on the beautiful of either sex.
Steve,
Focusing on capital gains would deal with the whole “hedge fund managers paying cap gains rate on carried interest” issue. Shuffling the regular income tax rates would miss this.
Matt
I don’t necessarily support Romney’s plan, but I can see a possible justification.
If you are working class, investing is rough. Every dollar you invest has a significant impact on your immediate lifestyle. On the other hand, as your income goes up, you have more flexibility with your income and can divert more funds to long term investments without significantly impacting your lifestyle.
As a result, the more money you have, the more likely it is that you will invest, just because you don’t have anything better to do with your money. If this is the case, you don’t have to worry as much about changing the incentives of the wealthy, they will invest any way, as you do for the poor, who may decide to consume now rather than later if the benefit of delaying consumption is not that great.
Robert Lewis: This is the best attempt at a justification I’ve seen. But I wonder what the empirical evidence shows about the relevant elasticities (“elasticity” is a fancy word for “responsiveness to incentives”) in the various income brackets. Surely there are people who know this without looking it up; I am not currently one of them.
The middle class is already largely exempt from capital gains thanks to tax shelters (IRA, 401K, etc) and the housing exemptions.
I don’t suppose that Romney is proposing to eliminate the tax shelters? That would be something. But it would piss off the financial industry, so probably not something a smart politician would suggest.
Perhaps I am more cynical than you. I actually laughed when Romney made that statement. It was another way of saying he opposes raising the capital gains tax, as Obama wants to, while trying to show off his class warfare street cred.
If that’s what he cares about, why not adjust income tax rates accordingly rather than focus on capital gains?
He’s trying to win the presidency as a centrist and his message will get filtered by a (he thinks) hostile media. What’s a good defensive posture? A conventional sounding, incremental tweak with Obama-like echoes. If he proposed to eliminate CG, NYT reporters (he thinks) won’t deliver an honest account of efficiency, instead they’ll exploit the public’s unfamiliarity on the topic to sell their generic GOP narrative:
Romney might think that NYT, Wash Post, David Gregory axis can’t reach for that boilerplate with something this small, inconsequential and Obama-conforming, they want a McCain “McCain will cut taxes, but doesn’t know how many condominiums his wife owns!!! story to tell. See e.g., 9-9-9. Fox and WSJ already hate him, and their love probably harm his strategy so he ignores them.
I’m a social democrat and for sure not a Romney apologist, but here are some reasons why the tax cut might make sense (at least to a Republican):
1) Romney wants to help out wealthy retirees who have no income, but have substantial property/equity holdings. My richest uncle who retired and sold his rental properties to support his retirement would have made a killing under this plan.
And since my richest uncle worked 80/hrs a week doing his own maintenance and dealing with intolerable tenants, maybe this wouldn’t be a bad thing.
I think that Romney wants to means test social security. This tax cut help the wealthy retiree weather the storm of loosing their social security payments.
2) Romney wants to reward small business owners who can grow their businesses. If you are a small business owner making $ 400,000/yr, you could choose to give yourself a salary of $ 199,999/yr. and put $ 200,001 towards growing your business.
Those small business owners who can succeed in building and then selling successful businesses would make a killing. And maybe this wouldn’t be such a bad thing.
3) Romney wants to encourage longer term growth strategies for publicly held companies. I believe that stock options become capital gains if they are held for 2 year from when issued.
This proposal would encourage more compensation to be given in the form or stock options that must be held for a longer period of time. This in turn would encourage longer employee retention and decisions that could affect the value of a companies stock beyond the existing quarter.
Anyway, like Dole, Romney will have a tough time becoming president if isn’t able to clearly explain why he is advocating his policies.
He also will also have a tough time becoming president if he has to say things like “Help me Anderson Cooper. That big bad bully Rick Perry has taken 35 seconds answer a question and now he is being mean to me.”
I’m not sure if you’re still looking at comments, but I remembered something. During one of the debates, Romney said that Greg Mankiw was one of his advisors. I was always under the impression that Mankiw was a bright guy, do we know what his thoughts on this are? I don’t necessarily think he’s the one who came up with Romney’s plan