Mitt Romney, a multi-millionaire, pays a 15% tax rate.  Warren Buffett, a multi-billionaire pays a lower tax rate than his secretary.   It’s primarily due to the fact that they make huge gains in investments every year and pay the very low cap gains rate.   Does this make sense?   As Paul Krugman noted the other day, cap gains are at an all-time low (see chart below).   This trend in declining cap gains started in 1997 and clearly hasn’t correlated with a booming economy.  So the traditional argument that high cap gains hurt the economy doesn’t seem to hold.  In fact, the most illuminating comments come from Warren Buffett on Charlie Rose who cites the fact that an investor rarely considers potential tax rates when making an investment (a general observation obviously):

BUFFETT:  I have yet– and I’ve worked with capital gains rates of 39.9 percent and 36 percent and 25 percent, I have yet to hear one person say to me, “If I call you in the middle of the night Charlie and I say Charlie I’ve got this hot investment idea.”  Your reaction is not to say “No matter what the tax rate, forget it, I’m going back to sleep because the capital gains rates are too high.”  No, what you’re going to do is you’re going to say, “Tell me the name, quick, Warren, before you change your mind.”  And you know, I have never had one person decline to invest with me.

ROSE:  Yes.

BUFFETT:  And I was running money 40, 50 years ago when rates were much higher and I never had one person to show the slightest reluctance to take an investment idea and run with it.

The point Buffett is making is that people don’t rule out broad investment decisions because of capital gains.   They might play a role, but how many times have you flat out decided not to buy a stock, bond or invest in something else solely because of the tax implications?  My guess is not very often.  Making money in the investment world is the goal.  The government gets a cut.  Those are just facts of life.  If you build portfolios entirely around taxes then you’re likely neglecting the more important part of portfolio building – the actual money making strategy!  This doesn’t mean taxes don’t matter, but I don’t think a cap gains rate of 25% is going to suddenly cause Americans to stop investing in corporate America….

Don’t get me wrong.  I love low cap gains rates because I’ve benefited from this as well (clearly not to the extent that some others have!), but unless I am missing something, this seems like another neoliberal myth that is helping no one except people who don’t really need the help….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Money invested comes from a revenue at some point, which probably has already been taxed. The lower the tax, the bigger the incentive, and this money is at risk so a higher incentive is needed i think. 25% wont stop Americans investing, but it will put some brakes for sure, and not at the best of times. The more you tax, the less you get, isnt it?

  2. Cullen

    In my view, instead of distinguishing solely between the terms of investment, short or long, we should be distinguishing between the *position* of the investment (my term, you guys might call it something else). What I mean is this; If I’m buying a stock on the secondary market, someone elses share not an IPO, Im not really contributing to the capital formation of some new company. Im just buying an asset like a house to resell later and it should just be treated as ordinary income if I make a gain. But if I invest in a new venture, actually provide needed capital to a project which hires new people, I should then get special tax treatment with that. TO ME, thats *true* investment. The previously described activity is gambling or speculation, which is a perfectly legal and fine activity but you shouldnt get special treatment for your winnings, IMHO.

    This is where I think there is room for better delineation. Going to Vegas is fun and legal and if your good and lucky…. God bless ya ….. but dont ask for special tax treatment of your winnings.

  3. Oh, I am not calling for tax increases on anyone right now….but this is food for thought as we come out of the balance sheet recession….

  4. I can get on board with that. Not sure the best approach in distinguishing forms of investment, but it definitely sounds like a reasonable starting point.

  5. I’m 100% behind this. Incentivize people to allocate capital to productive purposes, not casino games.

  6. Economcially there is no difference between investing in the primary or secondary market. The cost of capital is still relevant after an IPO for the purposes of secondary offerings etc. Plus if no one bought in the secondary market then all stocks would go to zero.

  7. I’ve never really understood why there’s a separate cap gains tax at all. Just lump it into your income.

    The “flat tax” nature of it as-is is a little bunk to me.

  8. Arrrggggg!!!! You evil capitalist you! You never look out for the little guy. You’re just in favor of capitalists and those money sucking vultures on Wall Street. Wait, wait, did I read this right? You’re arguing against the capitalists? Um….Sorry.

  9. I don’t mean to raise the JG argument again, but I love how consistently practical you are. And people still have the balls to say your position on the JG is politically motivated. I’ll let it die.

  10. “Economcially there is no difference between investing in the primary or secondary market. The cost of capital is still relevant after an IPO for the purposes of secondary offerings etc. Plus if no one bought in the secondary market then all stocks would go to zero.”

    Very good point. However I still think that the guy who makes the initial investment is taking more risk/ is using more imagination/is more forward thinking while the guy who buys it on the secondary market is simply good at evaluating a successful venture already created. There is a lot more information available to the second guy: The company already has sales to evaluate, a business plan to examine etc. The first guy is really taking a bigger risk…… thus I think he deserves a bigger tax incentive. Its not a matter of punishing the guy on the secondary market but more a matter of really rewarding the qualities that go into making a successful venture happen. I think those qualities are consistent with what Cullen cals productivity. There is no productivity without imagination.

    Again…. just MHO.

  11. I want to add something to your comment Erik because something just occurred to me. When you say

    ” Plus if no one bought in the secondary market then all stocks would go to zero.”

    Yes this is true but somewhat irrelevant I think. When someone buys a stock in the secondary market its because one can see whether or not that stock has any value. Its already producing and selling so its already tangible in a sense. It already has something to evaluate and account for. I really think its totally unrealistic to imagine a world where people, who want to buy things of value and sell them (that is the premise of capitalism isnt it?) would refuse to buy a portion of a company that is obviously capable of making money. Yes, it COULD happen and your premise would be true, but how likely is it to happen in the world we live in.

  12. I agree with whoever said above that capital gaiins should be taxes as regular income despite the fact that significant portion of mytaxable income is long term capital gains. I would actually tax all income at the oridnary rate. Get rid of all tax loopholes that benefit the few, including the mortgage interest deduction.

    Getting rid of all tax loopholes would actually lower the effective tax rate for most people.

    I would keep the current tax brackets and tax rates but get rid of all tax loopholes and tax long term capital gains and dividends at the ordinary income rate.

    I am virtually sure I will to live to see a simplified tax code like this one and I am [only?] 52 (I say “only” because when I was 18 52 seemed awfully old to me :-)

  13. If I remember correctly, the 15% capital gains tax is one of those policies that was designed to give money to the wealthy, the logic being that as long as the wealthy had all they needed the rest would have enough. I don’t think the wealthy, or a lot of other people for that matter, ever believed it was true. But it did help to support at least one political party, which is all it was ever meant to do.

  14. Aside from issues of inequality and unfairness, one thing I’ve always had a strong suspicion about the capital gains rate involves its tendency to create bubbles.

    Housing prices: http://seema.aggarwals.com/wp-content/uploads/2009/03/united-states-house-prices-last-33-years-533×400.png

    DOW: http://2.bp.blogspot.com/_SQWDfrgIr8s/TIJt-a2I4tI/AAAAAAAABV0/BJK4_5P62gI/s1600/Dow+30+year.jpg

    In 1997, Clinton and the Republican Congress signed the Taxpayer Relief Act of 1997, which brought down CGs from 28% to 20%, and made tax-free the gains on selling your primary residence under $500,000. From 1997-2001 of course, we had a massive stock bubble, as well as the first phase of our dreadful housing bubble.

    In 2003 (you know, the year that Peter Schiff made his DOW is going to 1000, Nasdaq 500 prediction), the 2003 Bush Tax cuts lowered the CG rate to 15%, and also lowered the dividends rate to 15% from 28%. And I think everyone knows what happened from 2003-2007.

    I know correlation does not always equal causation, but jeez, I’m curious as to why there aren’t some more big-player Economists studying this issue in depth. If a lower Capital Gains rate indeed helps form and exacerbate asset-price bubbles, that would IMO be the single most important reason to raise the Capital Gains rate to avoid future balance-sheet recessions. After all, CGs helps your multimillionaire/billionaire investor as well as your home builder and house flipper more than anyone else.

  15. I’ll not try to bring it up again after this Cullen, but I don’t really see how the JG is much different than Unemployment Checks that the government sends out.

    At least with the JG, America gets something of value rather than just a bunch of people doing nothing.

    Rather than a JG, let’s pay people to go to school and pass. If you are out of work, and need a paycheck, either help kids cross the street as a crossing guard, or get paid to go to school so your skills are up to date to make America more productive. No more sitting around for 99 weeks and maybe applying for some jobs, or maybe not.

  16. Seems like bad logic from Buffett. The reason nobody says “No matter what the tax rate, forget it, I’m going back to sleep because the capital gains rates are too high.” is because the market price of the asset presumably already reflects the fact that taxes are already “too high” or “too low”. It is priced in to get an investor a reasonable risk adjusted rate of return. And of course certain investments, the price cannot adjust low enough and Buffett is clearly wrong. How much would you pay for an investment which loses $100 90% of the time but has a payoff of $1,000 10% of the time if you are paying a 50% cap gains tax rate?

    Further, we should consider what types of investments have a highly variable return structure. It seems to me, they are the high risk, high return investments in technology that have the most promise for improving society in medicine, engineering, etc. So it may be best to think of the effect of the cap gains tax not only on the LEVEL of investment but the the DISTRIBUTION of investment. I’ve read a lot of “well, we can raise cap gains taxes and investors still have to invest the money somewhere”. True to an extent (it clearly makes consumption more appealing on the margin, though), but it may be a different and less optimal somewhere.

  17. Hey Tim,

    I wrote a pretty long series on the JG in the forum. http://pragcap.com/discussion-forum?mingleforumaction=viewtopic&t=249.0#postid-1468

    One bad policy doesn’t justify another bad policy. Besides, UE benefits are a temporary thing. The only reason they’ve been extended so far is because of the extraordinary circumstances. The JG would become a permanent form of workfare filled with potential potholes. The govt should spend to fill the unemployment gap. That’s the lesson from MMT. But does it really need to spend so inefficiently? I don’t think so….

  18. What James B. Stewart said…
    But the biggest reason for equalizing capital gains rates may be that it would generate a vast amount of additional revenue for the Treasury. The Internal Revenue Service reports that for taxpayers with the top 400 adjusted gross incomes, capital gains in 2008 amounted to an eye-popping average of $154 million for each of those taxpayers, or 57 percent of their adjusted gross income, and this in a year when the stock market plunged. In 2007, it was $229 million each, or 66 percent. Much of the windfall from higher capital gains rates could be offset by cutting the rate on ordinary income. For antitax zealots who vow they won’t accept one more penny of federal tax, all of it could be offset by lower rates on ordinary income.

  19. The _long-term_ capital gains tax rate seems like a red herring to me. It seems hard for me to understand how Buffet generates sixty-some-odd million dollars (his 2008 AGI) of net _profit per year_ from the sale of investments.

    Qualified dividends from domestic corporations (even though BRK.A/BRK.B do not pay any as far as I know) and muni bond income would seem far more likely to be the cause of his low effective tax rate.

    Remember that short-term capital gains are taxed as ordinary income, along with most dividends from mutual funds, corporate bonds, preferreds, ETFs, UITs, etc.

    The more relevant question (I suppose) would be about the carried interest rule.

  20. What is interesting about the data on the top 400 income filers is that a person rarely makes it on that list more than once. It seems to be a rotating (not revolving) list of people experiencing windfall events like selling a business, winning a lotto, receiving a big signing bonus, etc.

  21. This is a no brainer. The people who set the cap gains tax rate can legally trade on insider information. Many do, as evidenced by the fact that members of Congress outperform the market by a whopping 12%. That’s rock star hedge fund level outperformance!

  22. Especially considering just how poor of an understanding of the monetary system members of Congress seem to have…

  23. I think current tax rates do two things:

    — They incentivize a holding period of at least one year for stocks and currencies. If I will pay twice the tax if I sell before a year than after, I have to be convinced that the stock or currency is really going to tank to hold it less than a year.

    — Current rates provide a huge incentive to hold dividend paying stocks, and that is probably a good thing. Remember, “qualified dividends” are also taxed at 15%. I would rather hold a stock that pays a 3% dividend and pay 15% Federal (+ 6% VA State) tax than to hold a Treasury bond that pays 3% and pay 33% Federal tax on the interest.

  24. I am not wealthy and I got a few drops – especially from the tax break on “qualified dividends”. With ZIRP, my interest income has almost disappeared, and my dividend income has held up well.

  25. The claim is that lowering taxes leads to harder work, higher productivity, etc. And that higher taxes will make guys like Bill O’Reilly “maybe just quit” and stop employing all his staffers. So “job creators” won’t create jobs if taxes are too high.

    The truth is the exact opposite. Higher taxes FORCE you to work harder and smarter to get the same net income. Higher taxes force you to look for productive expenses like employees and equipment. As for cap gains, higher cap gains taxes force you to more closely evaluate your investments because you don’t get to keep as much as your winning investments, so you had better have fewer losers.

  26. Great site Cullen.
    Cap gain rates matter primarily to the extent that investments remain dormant or do not move to their best allocation. Buffet’s statements seem a bit silly and inapplicable to me, but he is a truly long term investor, and favors dividend investments when bottom-fishing. Though I generally believe cap gains rates should equal ordinary income rates, if the rate is not sufficiently low on both, cap gains which are largely optional simply will not be realized, sitting in presumably less efficient investments and producing less tax collection from them. The lesson from the cap gains reductions was a surge of tax collections as dormant unrealized gains were finally realized. If cap gains rates rise, collections will likely fall to the extent that realization is optional. To the point about new issues vs secondary, new issue valuation would be affected by differential treatment, as eventually the new issue buyer would want to sell, and the discount required by the seller would include the tax rate differential. The terminal investment value would still be dictated by the cap gains rate on prospective secondary market buyers.

  27. So the traditional argument that high cap gains hurt the economy doesn’t seem to hold.

    The economy would have been much worse if not for the lowered capital gains rate. The problem is they weren’t lowered enough! :)

  28. “The lesson from the cap gains reductions was a surge of tax collections as dormant unrealized gains were finally realized.”

    Yeah, I hear this a lot– the so-called lock in problem. The other way to solve it is to tax unrealized capital gains. Since we can define a risk-free investment return as synonymous as the Treasury bond rate (which, like the prime rate, is usually three points over FFR), William Vickrey proposed levying an interest charge at the time of realization (either sale of stock or death) for each year stock was held,with capital gains presumed earned equally over the years of holding. If it made life easier for investor, they could elect to pay taxes mark to market annually. A “Vickrey tax” would raise a sick amount of revenue and would eliminate the lock in problem (the hard way).

    As it happens, to get from here to there (plus also raising dividend rate to 35% since they’re pegged to long-term cap gains rates) would just require changing one subsection in the first section of the Internal Revenue Code. You see, Passive Foreign Investment Company holdings are already taxed in exactly this way. And when the CBO and Joint Tax Committee come back with eye popping revenue numbers (at least a couple hundred billion a year), it should be used to cut tax rates across the board.
    Section 1 of Title 26, United States Code, is amending by striking ‘(h) “Maximum Capital Gains Rate’ and then insert after subsection (g) the following, ‘(h) Vickrey Tax
    Notwithstanding any other provision of law, if the taxpayer disposes of a capital asset then the rules of Subsection 1291(a)(1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution in respect of stock in a passive foreign investment company.’


  29. Oh forgot to mention that between now and election day, the Democrats are going to drive Romney into endorsing taxing capital gains at ordinary income rates. Paying a 15% rate on his capital income wouldn’t have affected Romney 4 years ago, but in this economy the Democrats are going to hammer him till he defuses the bomb by agreeing to tax all income at the same progressive tax rates.

    The only way congressional Republicans will go along with that is if its Grover Norquist-compliant. The two elements of the “Taxpayer Protection Pledge are:
    ONE, oppose any and all efforts to increase the marginal income tax rate for individuals and business; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates”

    Grover won’t like it but technically if the revenue raised from taxing capital gains at ordinary rates is used dollar for dollar to cut tax rates, the Republicans in Congress could swallow hard and go along without breaking the pledge.
    The difference then between James B. Stewart’s plan and Bill Vickrey’s plan would be how progressive to make the tax code, Vickrey’s unrealized cap gains tax is a de facto wealth tax that would cut deeply into the Forbes 400 (remember over half to two-thirds of their income is capital gains, and that’s REALIZED cap gains). On the other hand, it would also cut everyone’s marginal tax rate just as deeply.

  30. 100% agree, a good investment is a good investment whatever the tax is !

    I still think it should be increased. Why ? it would allow govt to play a role in money redistribution to correct a biais toward the “already” wealthy. Am i being moral ? NO. it’s just that id’ rather have money spend in education or healthcare (to free some consumer capital indirectly) i.e. directed toward people who will SPEND it and not save it in offshore account, speculate on stock markets or put it in a hedge fund.

    Money would be more productive and capital allocation better…i know govt is not perfect but now that we have seen where the money is ending in this world and the use made with it wouldn’t it be the time to try something else…

    taxing this money wouldn’t worsen the balance sheet recession…it would make all those discussion around govt deficit a bit less sensitive (since this horrible debt would be lower)…and have decisions made oriented a bit more toward employment…and a bit more on a longer term basis

    PS: i am for a cap gain tax depending on the total income+ wealth (measured worldwide) of individual and companies not to impact the real entrepreneurs/small people (ie consumer). the google dutch sandwhich and goldman quasi zero tax is just a robbery

  31. Many politicians benefit from low capital gains taxes and one of the major objections centers around capital gains linked to inheritance. I don’t think raising capital gains taxes would make much headway politically unless you reworked the way inheritance works. The other question would be actually how much revenue would the government actually raise and would it be worth while. From a moral point of view I would be for it, but suspect that grounding investment back to reality and real production might be a better objective. Perhaps capital gains tax should graduated depending on size and levels of risk assumed in getting the gains or would that just create a different bubble.

  32. May be it’s more the case that the Secretary’s tax rate – not Warren’s – is too high.

    A secretary under a ( presumably) low wage should ideally have a zero per cent tax rate or even a negative income tax rate. Otherwise the government is making that person even poorer.

    Bottom line: raising the tax on Warren won’t make the secretary any better whereas lowering her taxes surely will – by immediately putting much needed money in her pocket.

  33. Ok, let me get this right. Cap Gains rate is “low” in retropsect AND is lower than four of the six 2012 fededral marginal income tax rates (10, 15 ,25, 28, 33, 35 )AND a small number of wealthy investors ONLY pay the cap gains rate because all (or most) of their income is from investments. ERGO, we need to raise the raise the Cap Gains rate. Sorry, Logic trumps progressive tax rates! How about we LOWER the higher marginal rates to 15% so its all even! Isn’t 15% enough for any goverment? It is enough for me!People, the Buffet & Romney stories are being used to illogically to manipulate us into wanting higher taxes. Don’t buy it!

  34. And It’s the cronies who get in on the IPO, not the ordinary investor. If you want to tax the cronies ie 0.01% at a higher rate, this won’t do it.

  35. I think at least part of the argument (for lower cap gains and dividend rates) is that this is the same money that is being taxed at the corporate level (at up to 35%). To the extent corporate taxes are a mess of loopholes and exemptions, the argument gets rather bogged down somewhat, but I do believe it is a valid one. I’d say sure lets tax investment income at ordinary income rates in exchange for a lower, (say 22%) corporate tax rate with no loopholes.

  36. I know people looking to incentive “real investment” or “real risk-taking” have their hearts in the right place, but that incentive should be built in via higher expected returns on an IPO. Having dual cap gains tax rates unnecessarily complicates the tax code.

    And as to another point, the lower capital gains rate policy really started getting ramped up during the mid to later 1970’s when the high inflation caused the real tax on cap gains to be much higher than the statutory rate since capital assets are not adjusted for inflation. Maybe to please everyone we could just tax all income as regular income, get rid of the loopholes, lower the rates and significantly reduce or eliminate the corporate tax.

  37. You are missing the point. I high cap gains rate tends to “lock” people into investments that they would rather sell. They will hold onto something rather than pay the tax. A low rate “unlocks” capital and leads to better allocation of capital.

  38. A couple of things

    1) No mention of state cap gains rates.


    As you can see, you can add 5 to 10% or so to the Fed rate in 43 states. (7) have no cap gains taxes. Of course those states are growing faster than the states that tax cap gains. Inconvenient truth Number 1.

    2) Countries that do not tax capital gains grow faster than those that do. Correlation is the higher the cap gains tax rate, the slower the growth.
    If the statists/Democratas/RINO’s want more tax revenue, try raising the cap gains rates to 50% and watch a flood of money leave for the countries that want growth.

    Of course that is before our dirigistes in Wash DC put on capital controls. Their coming, so be prepared.

    Capital goes where it is treated best. Inconvenient truth Number 2.

    Ron Paul gets it. The Republicrats don’t.

  39. That is what I think too. Federal ordinary income tax is too high. Unlike Europe, we also pay alll kinds of toher taxes other than this one, which bring our real tax rates to 40-50%, in line with Europe and Canada. We don’t get equal benefits though.
    The tax rate should be cut to match the level of benefits we are getting.

  40. For a site of pretty financially savvy people, I see the same sort of muddling of long-term and short-term cap gains rates, qualified and non-qualified dividends, carried interest, marginal vs effective tax rates, etc.

    I have a hard time believing that the 15% rate for long-term capital gains is the primary driver of the effective tax rates of people like Buffet (or Romney).

  41. I would frame this in a slightly different way. What I would say is that the first priority is fairness. Come up with a system of taxation that utilizes one or more of the tax mechanisms we can effectively enforce (income, dividends/cap gains, corporate earnings, etc…) in a way that treats the flow of money through the economy in a way that meets a standard of fairness that we can reasonably and rationally agree on (that is to say, compromise on). Second, if there are opportunities to trade a nominal amount of perceived “fairness” for a larger amount of perceived “social benefit”, then we measure one against the other and do it. Maybe we find that offering tax breaks for job creators favors the rich, but it more than offsets the X amount of social mobility it prevents. Third, what is the right amount of taxation? This is both a question of the size of government and the state of the economy, per Mosler’s prescription that taxation be used to adjust aggregate demand.

    IMO, it can get very confusing trying to solve these out of order.

  42. All the theory above is nice, folks, but …

    I don’t want one more damned nickel of my money to go to Washington, DC via higher tax rates on income my talents generate – whether ordinary or preferred rates apply – for one simple reason …

    There is no way that incremental taxation will be employed as wisely as I will employ it.

    End of story.

  43. Increasing capital gains would likely increase use of retirement accounts(I stoped funding mine recently)and drive more people into real estate rentals where you can hold off these gains for years

  44. I could get behind the lower tax rate for everyone PROVIDED we dont then have these “balanced budget amendments” being considered. In our current paradigm of Washington where every tax cut needs to be “paid for with spending cuts” I cannot support tax breaks. These will just be used as an excuse to cut services we can no longer “afford”

  45. OK, help me out on this. I earn money at my job, and I’m taxed on it-City, State, Federal, FICA – roughly 60% in all. What little that is left over, I save.This endures another, more pernicious tax – inflation.

    If, despite periodic 50% declines in the stock market due to government(Obama & The FED) mismanagement of the economy I risk it in the stock market, ignoring the permabears who regularly tell me I’m going to lose it all, and magically I actually MAKE money, I’m taxed AGAIN based on its historic cost – which overstates my REAL gain.

    Then, and here’s the really good part; when I die, you tax me AGAIN!

    You ask is the cap gains rate enough? It’s NEVER enough for you liberals!

  46. Are you really alleging that romney’s total, all in tax rate is 40% – 50%??? Really????

  47. “Don’t ever take a fence down until you know the reason it was put up.”
    G. K. Chesterton

    The 15% rate wasn’t arbitrary…. There was a reason. What was it?
    I believe the cap gains tax was part of the negotiations that executives should derive most of their compensation from the companies stock performing well. Do you all want us to revisit a time when officers were paid in cash and didn’t care about the stock price?

  48. They shouldn’t care about the stock price. They should care about the company strategy and longevity. The short-term thinking geared towards quarterly statements destroyed US companies , US economy and US labor market.

  49. Buffett pays himself a paltry salary. His main income is from dividends which are taxed (as stated in this thread) at 15%. So, he structuring his income in such a way that he pays as little taxes as possible. Buffett doesn’t like paying taxes as well. He isn’t that altruistic as he wants to portray himself. He’s a Wall Street crony a well.

    In the country I live we have a flat taxrate since 2001. One is worth X at the beginning of the year and one is worth Y at the end of the year. Then one adds X to Y and divide it by two. And on the outcome one pays one flat rate. And the house one lives in isn’t considered to be an investment. Dividends and interest received aren’t considered to be income any more, which is, like in the US, taxed progressively.
    No funny things like “”qualified dividends””, “”capital gains tax”” or “”tax exempt munibonds”” or interest taxed at e.g. 33%. No wonder the US taxsystem is such a good source of income for US taxadvisors/councillors.

  50. ZIRP is NOT a policy instituted by any government or the FED (like the MMT folks believe). It’s Mr. Market that determines interest rates. I am not convinced dividends will remain at this (high) level. Like they didn’t in the (early) 1930s. In a (severe) deflationary environment companies will find it harder and harder to keep dividends a this level.

  51. By adopting highly progressive taxation on returns to capital in secondary markets which you advocate

  52. I dont buy that “Its taxing the same money baloney”. Income taxes are on a flow of income not on a stock of dollars. People who talk this way are acting like a dollar is a *coupon bond* of sorts and when you receive it as income you cut off a little of it and pay a tax. When you then buy something from someone else with that dollar you cant say “Hey that dollar has already been taxed, dont tax it again!!”??? Thats not at all how it works, and shouldt be how it works.

  53. Typical knee-jerk conservative response. Just call people names. Blame taxes on liberals. But, hey, maybe you prefer the path W took – increase spending, fight two wars, create a new prescription drug program, and deregulate. Yet you blame Obama for our economic mess. You really are clueless.

  54. ” high cap gains rate tends to “lock” people into investments that they would rather sell. They will hold onto something rather than pay the tax. A low rate “unlocks” capital and leads to better allocation of capital.”

    Im not sure about that Houston. This is at the margin thinking. Yes there may be a guy who doesnt want to sell and pay the tax but the overall market will not be that way. Prices will rise, if there are buyers, to the point where it becomes profitable enough to sell.

    This reminds me of a guy I work with who claims that if taxes go up too much he will refuse working overtime cuz it wont be worth it . Maybe so but the goal of the market is not to get HIM to work overtime its to get someone to work overtime. Someone will take the money. If no one wants to, and the work still needs to be done the overtime rate will rise.

  55. Not sure if you’ve heard Robert Reich’s proposal regarding cap gains, but he wants to introduce laddered cap gains rates that inversely correlate to holding periods. If cap gains rates were to ever incite longer holding periods, his proposal would likely do it (though I would note that he still advocates increased cap gains rates across the board… his system would just silence the neoliberal myth that cap gains rates need to be held low so as to promote capital formation – I thought saving was a virtue on its own – as individuals would still have the ability to hit a 15% rate, only it would require a holding period in excess of 5 years)

  56. That’s an interesting idea. Is he proposing a ladder like follows: 1 day – normal income tax, 6 months – 30%, 12 months – 25%, 5 years – 15%?

    I haven’t thought all of this through well enough to form a solid opinion, but that certainly sounds like an intriguing and logical idea….

  57. This is also similar to the high frequency trading argument. Our markets are plenty liquid. I don’t buy the argument that we need more liquid markets just so you can make sure you sell at a penny spread rather than a nickel spread….

  58. Like I said, people get locked in to investments when the cap gain tax is too high. That’s why, at times when it has been lowered, there are a flood of cap gains taken to take advantage the lower rates. It happens every time.

  59. Indeed, reminds me of the smell of the arguments of advocates of Dark Pools.

  60. 1. Pull up a chart in which the Fed’s Fund Rate and the 3-month T-bill rate are depicted from about early 2006 up to early 2009. You’ll see that the 3 month rate went down in 2007/2008 before the official FED rate was lowered. The FED was simply forced to follow.
    In that light consider the following: In mid 2011 Benny Bernanke said that he would hold rates at nearly zero up to (and including ???) 2013. Then I know that he is convinced the current financial disaster is to continue into – at least – 2013.

    2. In early 2004 Greenspan encouraged folks in the US to take out adjustable rate mortgages. But in mid 2004 he started to raise rates. IF the FED would be in control of interest rates then this encouragement was the most evil/criminal thing he ever did. IF Greenspan knew interest rates were about to rise in mid 2004 then why did he encourage/advocate this totally irresponsible behaviour in early 2004 ? And we all know that the rising T-bill rate from mid 2004 to 2006 was THE killer for the US subprime mortgage market.
    Someone with his knowledge should have known that rising rates was toxic for the US economy.

    3. Dividends WILL – IMO – be shrunk or eliminated completely because REAL interest rates go up in a “”recession””. In 2006 the nominal 10 year T-bond rate was about 5% but REAL interest rates were at about -1%, meaning that an investor is actually paying a company (the government ??) to buy and hold a corporate bond, instead of the opposite.
    But now – in a (deflationary) “”recession”” – REAL interest rates are positive. That means that a company with debt actually has a REAL financial burden. And corporations haven’t reduced their debtload significantly.
    According to my info, REAL interest rates were in 1932/1933 at about +12% and that’s a killer for any company. Even when e.g. the 10 year T-bond yield would be at say 1, 2, 3 or 4%.
    Watch e.g. the CRB index. When (not if) that breaks down then REAL interest rates are going through the roof (again).

    4. In 1994/1995 the 10 year T-bond yield went up from under 7% to over 8%. One Jim Puplava blames the “”bond vigilantes”” for this rise in interest rates but I know better. In those 2 years the USD amount of loans went through the roof as well and the gold-silver ratio went (much) lower. This indicates to me that money hiding in T-bonds was moving out of T-bonds and it went into the real economy. Money moved to greener pastures, into e.g. real estate.

  61. The rotating beneficiary is republican smoke; Krugman did a takedown of this – you can look it up on his blog if you are really interested.

  62. The 3 month t-bill was 4.82% on July 16th 2007. What sparked the big rally in bonds just a few days later? The FOMC Minutes came out on July 19th sparking the big move in yields lower:

    “Participants generally expected that inflation would probably edge lower over the next two years, reflecting the waning of temporary factors that had boosted prices last year and a slight easing of pressures on resources.

    …Over the intermeeting period, however, investors seemed to reappraise their beliefs that the economic expansion would slow and that monetary policy easing would be forthcoming.

    …Participants generally agreed that the housing sector was likely to remain a drag on growth for some time yet and represented the most significant downside risk to the economic outlook. Although starts of single-family homes had moved up, on balance, over recent months, permits for new construction continued to decline. A number of participants noted that inventories of new homes for sale remained quite elevated. Housing activity was seen as likely to continue to contract for several more quarters. Participants also identified a number of downside risks associated with their outlook for residential construction. The recent increase in interest rates for prime mortgages could further dampen the demand for housing. Moreover, a number of participants pointed to rising mortgage delinquency rates and related difficulties in the subprime mortgage market as factors that could crimp the availability of mortgage credit and the demand for housing.”

    Don’t watch what they do. Watch what they say. That July Minutes release changed the attitude of bond investors for the worse and they began massively discounting a rate cut they had been expecting for several months….

  63. I’ll have to dig up the blog post, but I think his thoughts were something along the lines of 1, but 2 but 5 at 10%. I’ve often thought about the capital gains tax as it relates to curbing the quick cash out bubble culture that seems so pervasive today, and Reich’s comments were the first to strike me as workable and easily implemented. Galbraith (senior) wrote extensively – largely on the back of Ricardo – on the merits of modifying tax policy in pursuit of altering business behaviors, and I think Reich is on the right track. His solution certainly calls the bluffs of those arguing for lower capital gains rates as a necessary precedent for business development.

  64. The “evidence” may be hidden by the fact that there is a massive amount of day trading that masks the “buy low and hold” investor like me. I try to buy low then hold and forget it until near the end of the year, then dispose of the losers. After a year of holding, the winners can be sold with only 15% taxes. Now I just need to sell high. A very difficult thing. What “evidence” are you referring too?

  65. Stop the presses— Forget Bill Vickrey’s modification of the capital gains tax to create a de facto wealth tax, earlier this month the Wall Street Journal (!?!) published a Ronald McKinnon op-ed earlier this month arguing for a wealth tax
    (To read the whole thing, search for the top headline at Google news).

    The Conservative Case for a Wealth Tax
    A modest levy on the overall wealth of the very rich would allow lower incentive-distorting income tax rates for them and everyone else…


    “In order to have a fairer tax system, we should implement a new federal wealth tax in addition to the federal income tax. Unlike the current income tax, the wealth tax would not rely on how income is defined. Rather, it would require that households list all their domestic and foreign assets on, say, Dec. 31 in the relevant tax year. With a large exemption of $3 million that effectively excludes more than 95% of the population, a moderate flat tax—say 3%, on wealth so defined—could then be imposed.”

    Let’s ballpark tax base at $30 trillion (factoring in both $3M deduction and that top 1% holds 35% and next 4% owns 27% of Nation’s $60T household wealth).
    3% would raise $900 billion a year, essentially you could zero out $15.3% FICA tax which raises about the same. Of course Uncle Sam doesn’t raise taxes to fund programs, it taxes to control inflation. So tie wealth tax to interest rates. Peg it to 3 month T-bill. which today was at 0.05%. A wealth tax levied at that rate would bring in $15 billion– less than half of what federal gas taxes bring in.
    Ahh, but the CBO projects interest rates will go back to 5% in the next five years.
    This hundredfold increase in T-bill rate would bring in $1.5 trillion a year. Since the CBO measure budge deficit over 10 years; levy the wealth tax now (at 0.05%) but immediately cut other taxes by $750 billion. By the CBO (and Joint Tax Committee’s) lights, that extra $1.5T a year starting in 5 years will cover the tab.
    By the time the CBO figures out (oh, in about 5 years) that their budget scoring model has been hacked and that interest rates aren’t budging from zero, it will be too late for them to do anything about it. :o)

  66. I think they closed the loop on the trick around the WSJ’s pay-wall

  67. Happy to find out I’m wrong about this-

    Also, can beo or anyone speak to more on pegging a tax rate to the T-Bill? I think I get it but can’t fully get my brain around it.

  68. OK, a wealth tax is like an small annual net asset tax (so unlike with property taxes, assets and liabilities are netted out), which makes more sense than the jumbo one-time net asset tax we impose on large estates.

    Here’s a chart showing 3 month T-bills rate for last 30 years.

    If a wealth tax tax rate is pegged to T-bill rate:
    1. It will put an anchor on interest rates
    2. It will reduce federal budge deficit (each point interest rates drop below 5% reduces 10 yr borrowing costs by $1T).
    2. It will be counter-inflationary (as interest rates rise, tax drain increases).

  69. This is just confused:

    they might play a role, but how many times have you flat out decided not to buy a stock, bond or invest in something else solely because of the tax implications?

    Look, they either play a role, or they don’t. You can’t have it both ways like you try to in this single sentence above. Are you saying that you never take into account the gains rate when you sell a stock or bond? If so, you are definitely in a minority. If that is not what you meant, then that “solely because” is rather meaningless since it is the margin we are talking about, and the tax implications changes where/when you make selling/buying decisions.

  70. Gosh before I get fleeced for one more ¢ …an effort to reduce waste in government would be nice. A proposal: Instead of raising any more revenue via taxes…cut that amount from existing government expenditures.

  71. Andrew Mellon disagrees with you. Not only was he Secretary of the Treasury in the 1920s, he personally paid more taxes that decade than any citizen except for John D. Rockefeller and Henry Ford.

    The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs.
    Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.


  72. I agree, no more individual income tax increases until the government eliminates waiste. I would further propose that corporations pay a 95% tax rate until they assume full financial responsibility for the economic damage created from the production of their goods and services. Corporations for far to long have been subsidized by the government as they have socialized these costs. I understand communist China does this but it is time that our corporations start owning this cost. Whether it is poisoning us through the pollution of our air, our water, the genetic modification of our food supply or through the financial “innovations” that destroy citizens savings and shift liabilities onto the tax payer.

    Of course this would alter the landscape of investment and take this entertaining game of self gratification we define as investing in a capitalistic system.

  73. Here’s where we WILL continue to disagree. I continue to believe that Mr. Market and not the FED determines rates.
    1. The FED notices a change in the credit markets and then changes it tone as well. They’re trying to pretend that they’re in control and they’re not.
    2. Short term rates were at 0.02% when the markets crashed in 1873 and then the FED didn’t exist.
    3. If the FED is in control then they also would be able to prevent deflation and the USD from rising.
    4. When “”conservative”” money senses trouble then they move out of stocks/bonds and move into T-bill. Thereby pushing rates down. Nothing more and nothing less.

  74. 1. No, those words only reinforced/accelerated the falling rates. Because, according to my info, T-bill rates were already falling (slightly). Rates were, in early 2007 and in late 2006 slightly above 5%.
    2. More over, from mid 2007 up to end 2008, the T-bill rate didn’t go down in a straight line.

  75. I haven’t seen Krugman’s piece, but I have seen the IRS data and I have read their brief. “Over the 17 tax years a total of 6,800 returns were identified for the table. There were 3,672 different taxpayers representing the top 400 returns of each year. Of these taxpayers, a little more than 27 percent appear more than once and slightly more than 15 percent appear more than twice.”


  76. Two major points I have not seen commented on sufficiently:
    1. Marginal projects: As a non New Yorker/ non silicon valley resident, I can personally vouge that a higher tax cost will reduce economic activity, capital projects, and LLc formation in the sub 50 million dollar arena. A higher tax rate would reduce the expected ROR and prevent some small business activities. I work with local businesses which fly under the radar scope of the big boys, exactly the type of companies who do contribute the most to job formation. This is not theoretical, we work on a smaller margin. Change this tax rate after the economic recovery gains strength.
    2. The carried interest rule is the problem. Hedge funds can trade 100 times a second and have gains washed as long term. The same goes for futures and options to a degree. I hazard a guess that this constitutes a large portion of the top annual income earners per year. This hyper trading is exactly the type of capital market foundation we do not want, and it should be taxed differently. This is the huge loope hole that only accredited investors can use.

  77. 15% cap gains tax seems about right…the issue is that the income taxes are far too high.

  78. The term ‘Monetary Realism’ was coined by Merrill Jenkins (deceased 1979) in his ‘Treatise on Monetary Reform’. Jenkins is referred to by his followers as the first ‘Monetary Realist’. There is a Monetary Realist Society based (with a facebook page) which continues to propagate his ideas.

    Funnily enough, Jenkins absolutely detested fiat money, calling it “the greatest hoax on earth”, and was a gold currency/ competing currency advocate. Members of the Monetary Realist Society appear to be mainly rightwing so- called ‘libertarians’, Ron Paul supporters and conspiracy nuts.

  79. Why is the cap gains rate for US equities zero if you are a foreigner? Or if you are a hedge fund based in the caymen islands, owned by a trust in bermuda, with a beneficial account holder that is a BVI company, held by another trust, and ultimately by a partnership of US investors?

    Don’t tax the savings, tax the transaction. If congress were smart, they would slap a .5% tax on each side of a trade. that would go a long way to reduce volatility and programmed trading, while increasing the tax take.