Attacking Capital
Democrats in the House have begun following the example of their Senate colleagues in pushing for tax hikes. Once again, the Democrats have targeted capital, this time by more than doubling the capital-gains rate for investment firms:
Top House Democrats today introduced wide-ranging legislation that would more than double the tax rate that private equity firms, venture capital funds and many hedge funds pay on their gains.The proposed legislation would cause the most comprehensive change to the capital gains tax law in decades. It was authored by Rep. Sander M. Levin (D-Mich.) and introduced by Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee, and Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee. ...
The proposed legislation represents the first comprehensive measure to raise rates on the tax treatment for all hedge funds and buyout firms, which have drawn congressional attention because of billion-dollar paydays for fund managers, Bloomberg news service reported.
Lawmakers are targeting carried interest as part of a broader examination of how hedge funds and buyout firms are taxed. Informal estimates show that taxing carried interest at the same rate as salaries may generate at least $4 billion a year in additional taxes, Bloomberg said.
The new tax attacks the engine of American economic growth: capital investment. These funds provide the funds that start businesses and create jobs. The lower tax on gains allows more money to stay in the economy, as investors can pursue greater risk when they keep more of the gains they earn. Reduce the earnings, and not only is there less to reinvest, it creates more hesitancy to risk what there is left.
Of course, the Democrats don't see that. They see an opportunity to raise revenue in the short term without considering the long term effects. The expansion of the last four years has taught them nothing. They want to start passing new top-down programs, and they need to start passing more confiscatory tax policies to fund them.
This is why elections matter. The Republicans certainly didn't cover themselves in glory on spending issues the past six years, but we're about to see Congress go sharply in the wrong direction. They will claim fiscal responsibility by passing more taxes to pay for their spending, which will make even more money available for earmarks, lobbyists, and the like. That's the real trap of government expansion -- it feeds on itself, and the money always runs short.
We have sixteen months of a Democratic Congress to endure. Hopefully they will leave a few dollars in our pocket by then, but at the rate they're going, it's looking grim.
Posted by Ed Morrissey on June 22, 2007 6:45 PM | Comments (22) | TrackBacks (0)
Comments (22)
Posted by Gary Gross | June 22, 2007 8:42 PM
With their JA rating at 14% & with them proposing tax increases, Pelosi will be a one term speaker.
Posted by Bostonian | June 22, 2007 8:55 PM
Cap'n,
As a longtime reader, could I persuade you to make a distinction between "tax rate hikes" and "tax revenue increases"? They are not the same.
The phrase "tax hikes" gets applied to both, although what is usually meant is "tax RATE hikes."
Posted by ShochuJohn | June 22, 2007 9:06 PM
I'm a bit baffled by your logic here:
"They will claim fiscal responsibility by passing more taxes to pay for their spending, which will make even more money available for earmarks, lobbyists, and the like."
Since when has the availabiliy of money had any impact on spending? They operate independently of each other, with the spending usually outstripping the revenue substantially.
"The new tax attacks the engine of American economic growth: capital investment. These funds provide the funds that start businesses and create jobs."
Yes, yes, I'm sure everyone understands Econ 101. The problem is that we need the revenue because spending is not going to be curbed period. While taxes are never good, being mortgaged up to our ears to every bank on the Pacific Rim is worse.
"The Republicans certainly didn't cover themselves in glory on spending issues the past six years,"
That's the understatement of the century. Again, taxes are never a good thing, but when it comes to electing tax and spend Democrats or borrow and spend Republicans, I'll take the former. I supported Republicans all through the 1990's, but they have at this point lost any and all claim to fiscal responsibility.
Posted by Mwalimu Daudi | June 22, 2007 9:29 PM
Another gift from the Democrat-controlled Congress (with their whopping 14% confidence rating) to the GOP. Christmas has come early.
Or Christmas will come early - if the Stupid Party drops the idea of amnesty for illegals!
Posted by MikeD | June 22, 2007 9:36 PM
Republican or Democrat, it makes no difference. They smile, each in turn lies and says they are different and this time they have the answer. Really, really, really! Cross hearts and hope to die! And all the poor schnooks numbingly nod in faithful acquiescence, deluding themselves, once again, that this time will be different. But it is always the same, the pols never produce for anyone but themselves, the schnooks never do get any smarter and then it is BOHICA, BOHICA, BOHICA. We need Madame Guillotine!
Posted by Georg Felis | June 22, 2007 10:18 PM
Yes, but they can do so *much* damage in 16 months, that it can take us 4 years to recover.
Posted by Carol_Herman | June 22, 2007 11:22 PM
Captain, picture a football game.
In November 2006 "the ball" was placed on the 51st yard line. And, unlike most football games, where you hae two distinct sides; here you have something a bit looser. Anybody can take the ball and run. Anywhere.
But the HOUSE? With Nancy's rag, and the Ma & Pa Kettle Show in full swing; they've managed to tank out on their popularity ratings.
While over in the Senate? Did you notice Mitch McConnell folding his cards? Not just Kay Hutchison, now!
How hard is it to count 60 votes? Well, I can tell ya this, on immigration, Trent Lott's not holding them!
And, in the House? 435 people, who ever two years, lkeep going back into their election cycles.
While Dubya and the Soddies? I'm reminded of Ken Lay. Ken Lay was sure Bush was gonna bail out Enron. Didn't.
So, the street named "loyalty" runs only one way. Away from the politicians.
The Supreme's did just rule against the nurse, by the way. On the Adjusted Income Tax; and she's caught out. It ain't for rich folks, anymore.
Taxes isn't the Bonkey party's winning argument.
And, having only a ONE PERCENT ADVANTAGE doesn't help ya, when playing football, either. If you've got no one talented enough to run with the ball.
You bet, the Internet is stronger. It gets the audiences that dropped away from the old media.
16 months. And, the GOP is displaying their 2008 merchandise. Something's there for everyone. Including what DeLay said about politics. The real art is COMPROMISE. We'll get there, yet.
Posted by Fool Me Once | June 22, 2007 11:29 PM
What the corporate interests behind the amnesty bill seem incapable of comprehending is that if the bill passes, Republicans losses will be so heavy in 2008 that the Democrats will be free pass legislation that will destroy the economy. Any benefit that corporate America thinks it will gain through cheap labor will be lost many times over through tax hikes, legislation making securities class action suits easier, increased regulation, etc.
Those pushing for "comprehensive immigration reform are slitting thier own throats.
Posted by Wil Cruz | June 22, 2007 11:42 PM
So what we have here is not about the payday of Fund managers , it's about envy . The politicians who wanted these tax hikes especially on capital gains are jealous of successful fund managers raking in money and they want nothing more than punishing them for being successful regardless of the disasterous consequences those tax rates would do to investors , businesses and the american economy . Heck , just that very proposal already dropped the Dow , Nasdaq and S&P today .
But hey , those politicos and their friends will enrich themselves while blaming Bush and the Iraq war for the worsening economy caused by their tax hikes .
Posted by James I. Hymas | June 22, 2007 11:43 PM
Attacking capital? My interest was drawn to the following paragraph in the cited article:
Now, it is possible to make an argument in favour of differential rates for capital gains, dividends, interest income and earned income.
Here, though, it is clear that the measure is aimed largely at the practice of the managers taking their cut (normally quoted as 20%) of the gains as capital gains, rather than as income.
They don't have skin in the game (or, if they do, that participates in the capital gains and is quite properly taxed as capital gains. That's a separate issue). They are making this money for their expertise and their advice, not as compensation for putting their capital at risk.
It's much harder to defend a differential rate on this kind of income - which is doubtless why we are not seeing a defense here.
I'd like to see a few arguments on this ... but at first blush it seems like an entirely reasonable exercise in loophole plugging.
Posted by Niccolo | June 23, 2007 1:43 AM
Let's go back to what Bostonian wrote, a little too obscurely.
It's about the Laffer Curve. At a zero tax rate, there's no revenue. At a 100% tax rate, there's no revenue. What fool would work (on the books) so the government could collect every cent? In between there's a positive curve: up from zero to a high point, then back down to zero. But enough geometry 101.
On to taxes. If a particular tax rate is below the high point, increasing rate increases revenue. If above the high point, increasing rate REDUCES revenue.
So we have to ask ourselves: when the Democrats (or whoever) threaten to raise a tax rate when evidence indicates it's already on the downhill side of the curve and would reduce revenues, can we conclude that they are:
A. Dangerously ignorant;
B. Attempting to suppress market capitalism in favor of State Socialism; or
C. Rentseeking (to put it charitably).
Posted by Rose | June 23, 2007 2:11 AM
They clearly don't remember the Boston Tea Party - one wonders if they'd recognize the smell of tar and feathers, if they opened their windows.
Obviously they are closing their eyes to all the evidence of how hard they are pushing the taxpayers with all their graft and abuse.
Posted by Rose | June 23, 2007 2:16 AM
Yes, but they can do so *much* damage in 16 months, that it can take us 4 years to recover.
Posted by: Georg Felis at June 22, 2007 10:18 PM
&&&&&&&&&&&&&&
Your optimism is positively staggaring - what have they done to us YET that has been undone? Even after 40 years???
Posted by Ryan | June 23, 2007 5:03 AM
YOu feel better now, all of you tantrum throwers that put Democrats in office on the theory that "Well, if I don't entirely;y like what Republicans are doing, I'll make sure instead to put in something I'll COMPLETELY hate?
Posted by Ron C | June 23, 2007 7:48 AM
How much damage the Dims in Congress can do depends on one thing - use of the Presidents Veto pen. Use, or none use will decide who does the most 'damage.'
Posted by The Yell | June 23, 2007 8:06 AM
Praising Republicans for not hiking taxes like Democrats only works when Republicans won't hike taxes like Democrats.
Posted by quickjustice | June 23, 2007 8:15 AM
As chairman of Ways and Means, Harlem's Democrat Congressman Charlie Rangel, who enabled the near-bankruptcy of the Apollo Theater, and who publicly welcomed Hugo Chavez's donation of "free"oil to his constituents, now is running U.S. tax policy.
Killing the goose that lays the golden eggs neatly distracts attention from Charlie's failure to address repeal of the Alternative Minimum Tax that is strangling the middle class. Nicely done, Charlie!
Posted by James I. Hymas | June 23, 2007 8:54 AM
Niccolo: So we have to ask ourselves: when the Democrats (or whoever) threaten to raise a tax rate when evidence indicates it's already on the downhill side of the [Laffer] curve and would reduce revenues
Do you have any evidence for the assertion that the US economy in general or the hedge-fund industry in particular are on the downside of the Laffer curve?
Posted by jpe | June 23, 2007 9:09 AM
Indeed. The IRS could probably do this on their own w/o new legislation, because it seems fairly clear that what's going on is an incorrect characterization of the income.
This is less a tax hike than a police action - the managers should have been paying normal tax rates all along, but structured their compensation arrangements in such a way that they had an argument for lowered rates. Hell, McDonald's could probably do the same thing with its employees - if we told them to stop, it wouldn't be a tax hike, it'd be cutting down on abusive practices.
Posted by CoRev | June 23, 2007 10:46 AM
Tax hikes why? That is the question. The budget is on track to balance in 2008! After that there will be surpluses. What are those surpluses going to be spent on?
Why do we need to spend more?
The budget will have been balanced by controlling spending. Keeping spending GROWTH below the rate of economic GROWTH is fiscal responsibility. All the other claims not withstanding.
So, that leaves us with same question. Raising taxes, why? Growth trumps all, if allowed to proceed.
Posted by The Man | June 23, 2007 2:21 PM
CoRev
How do I get a piece of the action that we will have a balanced budget by 2008? Even the great decider has decided that the budget will not be in balance until 2012 at the earliest! And it is only in balance if we include the 612 billion dollar social security surplus.
Additionally, the CBO forecast for a "balanced budget" by 2012 assumes Bush's tax cuts sunset in 2010, which nobody on this blog will support.
Posted by CoRev | June 24, 2007 3:27 PM
The Man, sorry haven't been back. Take a look at the monthly Treasury report. it will give you a hint. We have been coming down at a rate near $100B/Yr. We were at $248B at the end of FY 2006. We are at $165B this month. It may be CY 2008 and not FY, but if you go to this site you can see the whole thing plotted. He does this every month check the past two months to see how it is shifting due to revenue.
June: http://www.optimist123.com/optimist/2007/06/deficit_watch_j.html
May: http://www.optimist123.com/optimist/2007/05/deficit_watch_m.html