Saturday, April 7, 2012

More Capital Gains?

The idea that reduced tax rates on capital gains is beneficial to the economy is based upon the false premise that capital investment create jobs and broaden the tax base. The is only true when capital is invested in things that actually create jobs. Investments that purchase plant and equipment might be deserving of a reduced tax rate, but so-called capital investments that are really just exchanges of equity from one individual to another neither create jobs nor broaden the tax base. However, ther vast majority of tax benefits for capital gain only do that. Additionally, there is no evidence that "carried interest" has a job creating benefit. In many cases income classified as carried interest is actually earned by closing businesses, eliminating jobs, or shipping jobs off-shore to other countries. The same is true when it comes to granting lower tax rates for dividend income. There is no evidence that lowering tax rates for income from dividends has any benefit to anyone other than the recipient of lower tax rates. Naby make the argument that dividend income is taxed twice. They claim that corporate income is first taxed at the corporate level and the same income is taxed again once passed on to stockholders in the form of dividends. However, dividends are distributions of after tax corporation income. Once the dividend passes from the corporation to the stockholder it is no longer corporate income and no longer subject to a second corporate income tax. Additionally, again there is no evidence that a lower tax rate for dividend income either creates jobs or broadens the tax base. It is very interesting that the most vocal arguments for reducing taxes in capital gains and dividends come from members of Congress who, themselves, are major beneficiaries of these tax benefits. They fail to recognize that rather than acting to increase jobs or broaden the tax base, the reduced tax rates actually result in an extraction of capital from the economy. Money that could be invested in job creating or tax base broadening events is removed from the economy and invested in activities with very limited range, usually just a buyer and seller. If economic stimulus is the goal of tax policy, stock market capital; gains should be taxed at higher rates than wages or salaries.