SubscribeMon 23 Jun 2008
Recently there’s a been some buzz around what Obama might do with taxes. Obama has basically said he would raise tax rates. While I try not to be too political on this blog, I don’t hide my politics either. I’ve got no problem with higher taxes when we’re running enormous budget deficits which we are. Does this mean I support every government spending program? Hardly, I think the Government is generally inefficient and wasteful. However, I think to balance the budge will require both spending cuts and tax increases. I personally support both.
I do think that one of the best places to raise taxes is on Capital gains. Capital gains rates are at historical lows. The maximum rate is Fifteen percent for long term holdings. According to the IRS 12 months constitutes long term. I know my girlfriend hardly considers 12 months a long term commitment. I’m not sure the IRS should either. Lengthening the holding term is one way of raising taxes as short term holdings are taxed at ordinary income rates. More capital gains would fall under ordinary income rules.
However, I believe raising the long term rates has merit. The fundamental argument for why capital gains should be taxed at lower rate than ordinary income is a good one. Invested capital does more for the economy than incremental labor. I believe this. Venture capital firms have created millions of jobs through their funding of once startups such as Apple, Amazon, and Microsoft. The extra shift I pulled at the Library in 1997 not so much. However the gap between long term capital gains and ordinary income is probably too much right now. There’s no reason for average Americans to pay in excess of 20-30% on their marginal income while only being taxed 15% on capital gains. Keep the rate lower, let’s say 10% lower than the equivalent marginal income rate. So someone in the 35% tax bracket would pay 25% instead of 15% as they do now.
On the other hand there is a real problem in that most Americans are not saving and investing enough. Raising the capital gains rate might potentially discourage middle class Americans from saving and investing. That’s a real problem, but one that the Government has tools to address. The government can giveth and taketh. By raising the capital gain rate, the Government would then be able to pay for additional retirement tax breaks. I love the ROTH IRA, and in 2010 it’s set to be available to everyone regardless of income, but the traditional deductible IRA needs some love as well. The Government should take the opportunity to extend the tax deductible IRA to everyone. It would be perfect opportunity for the Government simplify the code and allow everyone make tax deductible contributions up to some set amount. As things stand now, deductability is a function of how you’re empoyed. You’re in good shape if your company offers a 401K (15k a year of personal contributions and upto 40k including employer contributions), and potentially even better shape if you’re self employed (40k a year). If your company doesn’t retirement plan, and are not self-employed, you’re screwed. The most such person can contribute is the 5k allowed under traditional IRA rules . The government could easily fix all of this by allowing individuals to contribute upto 40k across all tax deductible accounts including tax-deductible IRAs.
If you enjoyed this post, please subscribe to the RSS feed
June 23rd, 2008 at 2:43 pm
you are absolutely right in saying higher taxes aren’t necessarilly bad with our deficits and that the government wastes money. But, taxing the wealthy (obamas plan) will not encourage them to invest in the USA and that could be a problem
June 23rd, 2008 at 3:38 pm
Raising taxes reduces the need to cut the budget, so I’d say the most effective plan is to cut expenses first and raise taxes later when it’s truly unavoidable. Imagine if Congress was barred from raising taxes while the budget was not balanced! Only then could taxes be raised to pay for new expenditures.
June 23rd, 2008 at 7:22 pm
John,
I disagree with your argument about taxing the wealthy. In fact, I would argue that IRS should further (on top of what obama is suggesting) tax the wealthy who would invest outside of USA.
June 24th, 2008 at 7:55 am
Jon, I think we’re at junction where we should do both. In the last eight years we’ve cut taxes in 2000 AND increased expenditures. I think higher taxes are the price we will all need to pay for the excess of the last 30 years.
As for taxing the wealthy, that’s where the money has to come from. While to some it might seem fair to tax everyone equally, it’s impossible to squeeze water out of stone. The wealthy need to pay more taxes simply because they’re the only ones who have the money. As for investing outside of the U.S., it doesn’t matter what the capital gains rate is. U.S. Citizen are required to pay U.S. tax rates on investments both inside and outside of the country. Of course many of the uber-wealthy actually get around these rules through good lawyers and accountants but that would remain true regardless what the cap gain rate is. Either way, I’m not really feeling sorry for the wealthy. We have it pretty good.