How to Destroy an Economy, Tip #37,865: Adopt Hillary’s Capital-Gains Tax Plan

Image: Shannon Stapleton/Reuters

(H/T Robert Wenzel)

Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme

By Larry Kudlow

The weakest areas in the weakest recovery since World War II are investment in new plants and equipment and investment in new business startups. These are the biggest job-creators, and their slump is a key reason for the subpar labor recovery, with low participation rates and an increase in involuntarily part-time workers.

So if investment is the problem, what does Hillary Clinton go out and do? She proposes jacking up the tax on investment. It’s almost inconceivably stupid.

In her latest economic speech, Clinton proposes doubling the capital-gains tax rate on the profit made from asset sales (stocks, bonds, real estate) held a day less than one year up to two years. Right now, if you take a capital gain a day more than one year, you are taxed at a 20 percent rate. Actually, it’s 23.8 percent when you include the health-care surtax. So under Clinton’s brilliant new play, you’d be taxed at 43.4 percent — the top individual capital-gains rate of 39.6 percent plus the 3.8 percent Obamacare surtax.

That means instead of keeping 80 cents on the additional dollar of profit, you’d only keep 56.6 cents — a 30-percentage-point reduction in the take-home-pay reward for taking an extra dollar’s investment risk.

This will create a tall barrier to investment — what we don’t need. If you tax something more, you get less of it.

Clinton complains about too much “short-termism” in the economy. But her program might well create more of it. That’s because she has a sliding tax-rate scale, whereby assets held two to three years would be taxed at 39.8 percent and assets held three to four years at 35.8 percent. And you don’t get back to the statutory 20 percent capital-gains rate unless you hold an asset for six or more years.

Who’s going to lock themselves into that? What if new investment opportunities arise? Want to convert your current holding into cash so you can invest in your brother-in-law’s start-up? Maybe it’s the next Facebook. Who knows? The point is, the Clinton plan exacts a huge tax penalty on the movement from old capital to new.

The late Jude Wanniski called this re-oxygenating the economy. Ms. Clinton would snuff that out. Her short-termism fear will lock us into long-term economic stagnation.

By the way, the numbers are actually worse, because capital gains are already taxed as corporate profits. What investors pay is a double tax.

So let’s go back to Hillary’s top cap-gains rate of 43.8 percent. The government takes 35 percent of your profit in corporate taxes, leaving 65 cents to be taxed a second time as capital gains at the new 43.8 percent rate. That results in a take-home profit of 37 cents on the dollar.

Is that enough to reward the risk of investing in the next Uber? Except for Mayor Bill de Blasio, who hates Uber, most people would say no.

But that’s Hillary’s plan.

How powerful is the capital-gains tax? The nonpartisan Tax Foundation rates it among the top three economic-growth influences on the economy, along with full cash expensing for new investment in plants and equipment and the corporate tax. And compared with the rest of the world, the U.S. has fallen far behind in terms of this investment-tax-penalty grouping.

This is government tinkering at its worst. The reality is that Hillary Clinton is attempting to punish success and redistribute income.

Did someone say “tax the rich”? Clinton proposes an income threshold of $484,850 for married couples filing jointly. Oh, my gosh! Successful economic activists! Let’s get ’em!

Ironically, history shows that periods of higher capital-gains tax rates produce less revenue as a share of all federal revenue and as a fraction of GDP. Hillary’s not even redistributing efficiently.

And then there’s what some call the “Charlie Gibson effect.” Gibson interviewed then-Senator Obama in 2008 for ABC News. Obama said he’d raise the capital-gains tax from 15 percent to 28 percent. But Gibson reminded Obama that when Bill Clinton and George W. Bush lowered capital-gains tax rates, revenues actually increased. In other words, the Laffer curve. But Obama said it didn’t matter because he wanted to be “fair.”

It also doesn’t matter to Hillary Clinton. She wants to beat Bernie Sanders, or at least cuddle up to the Vermont socialist. What nonsense. Bad economics and bad politics. Voters will understand this.

Goofy ideas like this make me yearn for a 15 percent flat-tax rate on everything. Personal income, corporate profits, capital gains, dividends — everything. But that still leaves me with a double-tax problem for investment and savings. So it’s probably time to blow up the corporate-tax code altogether. That would get us to the 4-percent-plus growth path advocated by some of the Republicans on the campaign trail.

And that would get us some “long-termism” economic growth — just what the country yearns for.

Larry Kudlow is CNBC’s Senior Contributor and author of American Abundance: The New Economic & Moral Prosperity.

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Rand Paul and the Libertarian Position on Taxes

Image: Associated Press

Rand Paul writes for the Wall Street Journal:

“[O]n Thursday I am announcing an over $2 trillion tax cut that would repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this ‘The Fair and Flat Tax.’

President Obama talks about “middle-class economics,” but his redistribution policies have led to rising income inequality and negative income gains for families. Here’s what I propose for the middle class: The Fair and Flat Tax eliminates payroll taxes, which are seized by the IRS from a worker’s paychecks before a family ever sees the money. This will boost the incentive for employers to hire more workers, and raise after-tax income by at least 15% over 10 years.”

Read the rest.

Lower rates are a step in the right direction, but what would be the ideal position? Taxes, no matter how low, are still predicated on coercion, and amount to nothing other than systemic theft of a population.

As a reminder, here is a piece by the great Laurence Vance on LewRockwell.com mentioning some key points about the libertarian position on taxes:

Can There Be a Half-Way Decent Tax Policy?
by Laurence Vance

“The best tax is always the lightest.” ~ Jean-Baptiste Say

“There cannot be a good tax nor a just one; every tax rests its case on compulsion.” ~ Frank Chodorov

“There can be no such thing as ‘fairness in taxation.’ Taxation is nothing but organized theft, and the concept of a ‘fair tax’ is therefore every bit as absurd as that of ‘fair theft.’” ~ Murray Rothbard

“Since the very fact of taxation is an interference with the free market, it is particularly incongruous and incorrect for advocates of a free market to advocate uniformity of taxation.” ~ Murray Rothbard

“The real issue is total spending by government, not tax reform.” ~ Ron Paul

When it comes to the subject of taxes, many conservatives and some libertarians just don’t get it.

The Tax Foundation, a “non-partisan research think tank, based in Washington, DC,” has six “principles of sound tax policy” that guides all of its research and “which should serve as touchstones for good tax policy everywhere”: simplicity, transparency, neutrality, stability, no retroactivity, broad bases and low rates. Good tax policy “promotes economic growth by focusing on raising revenue in the least distortive manner possible.”

The Tax Foundation recently charged education tax credits with violating “the principles of sound tax policy by greatly increasing the complexity and distortions in the tax code.” They should be eliminated “within a comprehensive reform package” for a number of reasons, among which is that “trading the elimination of education tax credits for lower marginal tax rates is good for economic growth.” The Tax Foundation does a good job of answering the question of whether “the tax code is the proper tool to increase access to higher education and make college more affordable” (it isn’t), but the organization’s proposal that the government should eliminate all education tax credits and use “the revenues to cut marginal tax rates across the board” is naïve. The government simply can’t be trusted to not turn around and raise marginal tax rates the next it “reforms” the tax code. And the fact that “trading education credits for lower tax rates” would “benefit the Treasury as well” means that the government would collect more money—which is always a bad thing. How about proposing keeping the education credits and cutting marginal tax rates?

The Tax Foundation also recently weighed in on the subject of sales tax holidays. It is against them. Sales tax holidays “are periods of time when selected goods are exempted from state (and sometimes local) sales taxes.” Although “at first glance, sales tax holidays seem like great policy,” they “are based on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform,” “introduce unjustifiable government distortions into the economy without providing any significant boost to the economy,” “represent a real cost for businesses without providing substantial benefits,” are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers,” and “impose serious costs on consumers and businesses without providing offsetting benefits.” Although sales tax holidays may eliminate taxes for some period of time, they “are not real tax cuts.” But even if, from an economic and political perspective, everything the Tax Foundation says about sales tax holidays is true, there is one thing they have dead wrong: Sales tax holidays are not just real tax cuts, because they eliminate sales taxes completely, they are the ultimate and ideal tax cut.

And then there is Dan Mitchell, formerly of the Heritage Foundation, now of the Cato Institute, who blogs at International Liberty. He is “a long-time proponent of the flat tax.” One reason is because “other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.” But because “a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point,” and “the two plans are different sides of the same coin” with no “loopholes,” even though he is “mostly known for being an advocate of the flat tax,” Mitchell has “no objection to speaking in favor of a national sales tax, testifying in favor of a national sales tax, or debating in favor of a national sales tax.” But as I have lectured about, the flat tax is not flat and the Fair Tax is not fair.

Surprisingly, although Mitchell despises Obamacare, he believes “that there’s one small part of Obamacare that will have a positive impact”: the so-called Cadillac tax on expensive employer-provided health plans. The Cadillac tax:

  • will slightly reduce the distortion in the tax code that encourages over-insurance and exacerbates the healthcare system’s pervasive third-party payer problem.
  • is merely making workers more aware of costs that already exist.
  • discourages overinsurance, and this is already leading to some positive changes in the marketplace.

Although I admire and recommend the work of the Tax Foundation and Dan Mitchell, and regularly visit their websites, for a more libertarian view of sound tax policy I suggest that we turn to Frank Chodorov (1887-1966) and Murray Rothbard (1926-1995).

From his essay “Taxation Is Robbery,” here is Chodorov on the morality of taxation:

THE Encyclopaedia Britannica defines taxation as “that part of the revenues of a state which is obtained by the compulsory dues and charges upon its subjects.” That is about as concise and accurate as a definition can be; it leaves no room for argument as to what taxation is. In that statement of fact the word “compulsory” looms large, simply because of its ethical content. The quick reaction is to question the “right” of the State to this use of power. What sanction, in morals, does the State adduce for the taking of property? Is its exercise of sovereignty sufficient unto itself?

On this question of morality there are two positions, and never the twain will meet. Those who hold that political institutions stem from “the nature of man,” thus enjoying vicarious divinity, or those who pronounce the State the key­stone of social integrations, can find no quarrel with taxation per se; the State’s taking of property is justified by its being or its beneficial office. On the other hand, those who hold to the primacy of the individual, whose very existence is his claim to inalienable rights, lean to the position that in the compulsory collection of dues and charges the State is merely exercising power, without regard to morals.

Taxation for social services hints at an equitable trade. It suggests a quid pro quo, a relationship of justice. But, the essential condition of trade, that it be carried on willingly, is absent from taxation; its very use of compulsion removes taxation from the field of commerce and puts it squarely into the field of politics. Taxes cannot be compared to dues paid to a voluntary organization for such services as one expects from membership, because the choice of withdrawal does not exist. In refusing to trade one may deny oneself a profit, but the only alternative to paying taxes is jail. The suggestion of equity in taxation is spurious. If we get any­thing for the taxes we pay it is not because we want it; it is forced on us.

And as Chodorov explains in his book The Income Tax: Root of All Evil (1954), the income tax means that the state says to its citizens:

Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.

The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.

From chapter 22, “The Nature of the State,” in his The Ethics of Liberty, here is Rothbard on the nature of taxation:

All other persons and groups in society (except for acknowledged and sporadic criminals such as thieves and bank robbers) obtain their income voluntarily: either by selling goods and services to the consuming public, or by voluntary gift (e.g., membership in a club or association, bequest, or inheritance). Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.

It would be an instructive exercise for the skeptical reader to try to frame a definition of taxation which does not also include theft. Like the robber, the State demands money at the equivalent of gunpoint; if the taxpayer refuses to pay his assets are seized by force, and if he should resist such depredation, he will be arrested or shot if he should continue to resist.

The libertarian approach to tax deductions and credits differs strikingly from those on the left and the right who want to simplify the tax code by eliminating these things to ensure that every individual and corporation pays some uniform and arbitrary fair share. Since the federal government is unlikely to ever eliminate the income tax, proponents of a free society should work toward expanding tax deductions, tax credits, tax breaks, tax exemptions, tax exclusions, tax incentives, tax loopholes, tax preferences, tax avoidance schemes, and tax shelters and applying them to as many Americans as possible. These things are not subsidies that have to be “paid for.” They should only be eliminated because the income tax itself has been eliminated.

From chapter 2, “Ten Great Economic Myths,” in his Making Economic Sense, here is Rothbard on tax deductions and exemptions:

A deduction or exemption is only a “loophole” if you assume that the government owns 100% of everyone’s income and that allowing some of that income to remain untaxed constitutes an irritating “loophole.” Allowing someone to keep some of his own income is neither a loophole nor a subsidy. Lowering the overall tax by abolishing deductions for medical care, for interest payments, or for uninsured losses, is simply lowering the taxes of one set of people (those that have little interest to pay, or medical expenses, or uninsured losses) at the expense of raising them for those who have incurred such expenses.

There is furthermore neither any guarantee nor even likelihood that, once the exemptions and deductions are safely out of the way, the government would keep its tax rate at the lower level. Looking at the record of governments, past and present, there is every reason to assume that more of our money would be taken by the government as it raised the tax rate back up (at least) to the old level, with a consequently greater overall drain from the producers to the bureaucracy.

And from chapter 4, “Binary Intervention: Taxation,” in his Power and Market, here is Rothbard on tax exemptions and loopholes:

Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master. It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone. The exemption itself cannot be considered unjust unless the tax or other burden is first established as just.

In the literature on taxation there is much angry discussion about “loopholes,” the inference being that any income or area exempt from taxation must be brought quickly under its sway. Any failure to “plug loopholes” is treated as immoral.

From a libertarian perspective, the goal should be no taxes whatsoever. To that end, any decrease in taxes or tax rates is a good thing and any increase is a bad thing and any increase in tax deductions or credits is a good thing and any decrease is a bad thing. No matter whom it benefits, no matter why the government does it, no matter who lobbied for it, no matter who supports or doesn’t support it, no matter how temporary it might be, and no matter how much complexity it adds to the tax code.


Originally posted on LewRockwell.com

Laurence M. Vance [send him mail] writes from central Florida. He is the author of King James, His Bible, and Its Translators, The War on Drugs Is a War on Freedom, War, Christianity, and the State: Essays on the Follies of Christian Militarism and War, Empire, and the Military: Essays on the Follies of War and U.S. Foreign Policy. His newest book is The Making of the King James Bible—New Testament. Visit his website.