Why Not Increase Revenue Through Growth Rather Than Punishment?
Phil Kerpen criticized the tax-first impulse of the current Congress, as demonstrated by the recent notion of increasing tax penalties on equity partnerships. In yesterday's Wall Street Journal, he makes the case that Congress itself has caused much of the problem it seeks to correct through the Sarbanes-Oxley regulation -- and uses the AMT to remind people what happens when Congress uses taxes to moderate the market:
Not content to merely spend the record influx of cash coming into the federal treasury, some members of Congress are pushing to hike the capital-gains tax on so-called "carried interest" -- the share of partnership profits, typically 20%, that hedge-fund and private-equity investment managers have not sold to their outside investors. This would be nothing more than a punitive tax on those the congressmen perceive to be making too much money.This is the same kind of thinking that led Congress in 1969 to enact the Alternative Minimum Tax. An effort to "soak the rich," the AMT was supposed to fall on the 155 households that, because their income was mostly dividends from municipal bonds, paid no federal income taxes. But, because lawmakers conveniently forgot to index the AMT for inflation, it now hits an increasingly large portion of upper middle income folks, especially those in "Blue States" such as New York, New Jersey and California, who write off large state and local income taxes on their federal tax returns. ...
Under current law, individual partners in an investment partnership such as a hedge fund or private equity fund are taxed based on what the underlying partnership income is; if the income comes from a capital gain, it is taxed at the capital gains rate. Ordinary income is taxed at ordinary income tax rates. This tax treatment is consistent with the rationale for a lower capital gains tax rate -- to alleviate the double taxation of corporate-source income and to encourage risk taking, entrepreneurship and capital formation.
The legislation Congress is considering ends those protections, saying in effect that it doesn't matter if the income is a clear-cut capital gain, such as proceeds from the sale of corporate stock. What matters is who receives the income, in this case politically unpopular rich guys.
All investors should be on notice that if the capital gains tax is considered a loophole for investment partnerships, it can't be long before the capital gains tax is raised for everyone else. Some leading Democrats, including Oregon Sen. Ron Wyden and presidential candidate John Edwards, are already calling to do just that.
Well, some might say, so what? Why treat one kind of income differently than another? Isn't that unfair, and doesn't it just amount to a dodge to allow rich people to pay less than their share?
Not all income is equal in terms of its benefit to the economy. Investment carries risks that need to be rewarded in a "progressive" tax scheme. Otherwise, capital would increasingly get locked up in corporations with a steady and predictable return, rather than in the new ventures that create jobs and growth for the economy. If a system doesn't recognize the value of the risk, fewer investors will spend their money on new ventures -- and the economy will lose its engine for growth.
Now, in this case, advocates of the tax hike point out that they would only be bringing the equity-partnership tax to the same level as the corporate capital-gains tax, which is now at 35%. Kerpen answers that by advocating a drop in that rate to the same level as the existing equity-partnership rate. If Congress wants to make up for the loss of revenue that will occur when they restrict or eliminate the AMT, then they should open up more risk-reward in the current tax system to create more growth. That would allow investors to take more risks and to get rewarded for it.
Kerpen notes that two-thirds of all voters are now investors. Congress should give them a break and allow them to reap the rewards of investment and keep America competitive.
UPDATE: Phil Kerpen is also the head of Americans for Prosperity, and he wrote at length about the proper strategy for capital-gains tax policy. He includes this chart to show the effect of capital-gains tax cuts and tax increases over a three-year period:
Posted by Ed Morrissey on July 31, 2007 11:38 AM | Comments (26) | TrackBacks (0)
Comments (26)
Posted by Rose | July 31, 2007 1:12 PM
Our Founding Fathers, who generally all came from what was basically fiefdoms - what else was there at that time???? - all hated income and property taxes.
After less than 100 years of it - one really should ask, IS THE TRADEOFF of HAVING THESE TAXES actually WORTH IT???
Nah! If 95% of it were trimmed, we would ALL be better off.
Letting DIM SOCIALISTS walk off with power over the Judiciary and Penal systems was particularly stupid. But with an over-abundant supply of American citizens' TAXED DOLLARS flowing like a million cornucopias...it's positively revolting.
We've reached the point where we cannot even give them credit for taking care of roads, national security, and crime, like they should be able to with that amount of cash flow - and after that, they get much worse.
My idea of hell would be where they get to have others do to them as they have done to America.
Jerk that pen for signing checks OUT OF THEIR FAT HANDS.
Don't let them have anything they cannot pass on a National Ballot in a General Election. With a 75% vote or better.
ITEM BY ITEM.
Posted by Mal Carne | July 31, 2007 1:12 PM
I'd take a good, long hard look at Wall Street before advocating rewarding high-risk investment with low taxes.
The whole concept of "securitizing" stocks and mutual funds, when you sum it up in two sentances or less, is just plain stupid. The whole system collapsed when someone getting minimum wage said the magic words, "I can't pay that..."
Reward investment that generates genuine, material wealth, not paper.
Posted by Darren | July 31, 2007 1:24 PM
I agree with Rose. The question shouldn't be, "Why not increase revenue through growth?" The question should be, "Why increase revenue at all?" It doesn't need to be increased. It needs to be decreased, as does spending. I'd like to see the American people get down and dirty and have a real debate about the morality of taxation itself. I firmly believe that every single thing the government claims only it can do can be done by competing private businesses and organizations that have to EARN their money by convincing you to voluntarily donate to them or pay for their products or services. Sure, there would be free-riders, but so what? The unimaginable benefits of living in a peaceful, prosperous society based entirely on voluntary action would far outweigh any frustration we would feel about some lazy free-riders.
Posted by OC-Chuck | July 31, 2007 1:33 PM
Hey Cap,
I can't read the chart and the link goes to a letter...
Posted by Captain Ed | July 31, 2007 1:46 PM
Chuck,
I think both are fixed now.
Posted by FedUp | July 31, 2007 1:47 PM
We don't need to raise revenue! If we get rid of all the pork that is being doled out with lavish hands that should give us a fat surplus without even blinking. Then, stop foreign aid to everyone who comes their hands out and cut back on the contributions to the UN. In fact, move the darn thing to France and let them put up with all the 'diplomatic lunacy' .
Rose... you should have made that 'their fat DEAD hands'
Posted by OC-Chuck | July 31, 2007 2:05 PM
Looks good now, thx (both in viewing and information!)
Posted by TombZ | July 31, 2007 2:12 PM
Mal Carne - you have the straight poop on what constitutes 'real wealth' in your judgement? I think I'll leave it to the market to decide where the value is. Increased liquidity has its own value, even if you don't like who benefits and how.
Otherwise, about taxes, what to do? Is it better to set tax rates at the lowest level that generates maximum revenue? Or to use tax policy to punish those who make money (or, 'create real wealth')? If you're a Democrat, what's the best way to pander to your base?
Alternatively, as a conservative, should we cut taxes in order to restrict state & federal revenues and decrease political interference in our lives?
I propose one reason why we have a historically low savings rate is to due to higher (real, inflation adjusted) personal taxes. When taxes are increased against your established budget, where does your tax payment come from? That and the fact that many are betting on the government to step in and save them from themselves.
Posted by Count to 10 | July 31, 2007 2:14 PM
If we got rid of the corporate profit taxes, we probably wouldn't need a multi level taxing system. Between the, what is it, 35% corporate tax, the 15% dividend tax, and whatever states add on, we are talking a tax rate in excess of 50% on investments.
And, don't forget that, as far as capital gains goes, you don't get reimbursed in taxes for losses. If you pay 15% taxes on each profitable transaction, and you only "win" 15% more than you loose, the effect is a 100% tax on your profits. Worse, if you have an even more marginal success rate, you can pay more in taxes than you made in profits (something similar happens to winners of civil suits).
My suggestion: if all investment could be lumped together in an account, untaxed, and withdrawals from that account were added to income for purposes of taxation. That way, you could still soak the idle rich sitting on their wealth, but not hold back the productive but frugal.
Posted by the fly-man | July 31, 2007 2:17 PM
Here is another classic wait until the Democrats take control again to provide cover for the feeble inactions of the Ruling party and it's trifect of control. I cheer the fact that the stock market did so well in the last 6 years but equity is in the eye of the one who's been left behind without any. Why all of a sudden is PORK a big deal with the GOP? Well, they feasted on it arogantly all at a cost for handing their votes over to the party. Now that the party is not in control, oh boy we better figure out a way to keep those other guys from doing what we know they'll do! The GOP reminds me of the walrus from Alice in wonderland.
Posted by Thomas Jackson | July 31, 2007 2:54 PM
I asked a friend of mine in the IRS what would happen if the government initiated a flat tax of ten percent with no deductions, except for dependent children.
He responded that the government wouldn't be ab;e to handle all the income.
The tax laws exist to prevent the accumulation of wealth. It doesn't punish the wealthy who have ample ways to hide their wealth.
Only Marxists could like our current system. Perhaps someone can explain to me the justice in taxing two cab drivers at different rates because one works an 8 hour shift and the other works a double 16 hour shift and thereby earns twice as much.
Posted by docjim505 | July 31, 2007 3:07 PM
I seem to recall reading that, when the income tax amendment was being drafted about a century ago, there was some discussion about setting an upper limit of (IIRC) 5%. This idea was shot down: "Why would it ever get THAT high???"
How times have changed...
The tax code as it exists is NOT based on any sort of logical scheme to maximize revenue, nor even to prevent the accumulation of wealth (as Thomas Jackson states). It is "designed" (if one can use such a word to describe such a mess) to allow elites to reward and punish. It is based, quite simply, on malice. Think of the phrase "make the rich pay their fair share". Does not this statement brim with jealousy and hatred? Somebody has more than you. Rather than try to bring yourself up to their level, you use the tax laws to try to drag them down. Politicians assure their reelection (and often line their own pockets) with the money they confiscate, rewarding one constituency while penalizing another. It is an inherently corrupt and corrupting system.
I agree with Rose and Darren: it's high time to change the paradigm. Let's not think about how we can give MORE money to the government; let's think about starving the beast a little bit.
Posted by Ray | July 31, 2007 3:25 PM
Apparently the Democrats are not happy with the amount of taxes the fund managers payed on the income they received from these "Carried Interest" payments.
Once again the Democrats are trying to punish success.
Typical socialist agenda: Some rich people are making a lot of money by investing in our economy? Well, that's not fair! If the economy improves, these people will make more money! How dare they cash in on the successes of America! This has to stop! To make them suffer, we will not only tax the income they receive, we'll tax the capital from which this income is derived! They won't profit as much from their investments in our economy! That'll show them! You say that people will be less inclined to invest in our economy? We don't care! They should not be profiting off our economy anyways because they're already rich!
Posted by Rose | July 31, 2007 5:31 PM
Posted by: Darren at July 31, 2007 1:24 PM
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Wonderful!
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Posted by: FedUp at July 31, 2007 1:47 PM
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YEAH!!! MEGA DITTOS!!!
Let's make that "COLD fat dead hands"
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Posted by: TombZ at July 31, 2007 2:12 PM
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Yeah, taxing SMALL savings accounts was a brilliant stroke for AMERICA. Simultaneously changing the lawsuits codes so that small private entities now need to be insured the way that formerly only very large businesses needed to be...
Government MANDATING that certain types of companies have our MANDATORY business while making it cost prohibitive to Save or Inherit...
People, if our Founding Fathers revolted over a non-representative tax levied on Tea, what on earth would they do with this - taxed OUT of profit, out of being able to prosper, out of being able to save for one's own "rainy days" or retirement, or college funds, or new roofs, or new tractors... out of being able for families to build, OUT of being ABLE to make charitable donations where we please - taxed INTO government "ENTITLEMENT PROGRAMS" with 6 month waiting lists for EMERGENCY SURGERY??? And mandatory coverage for CHILDREN 25 yrs and younger including ILLEGAL ALIENS???? With a system so screwed they are sending traffic tickets to MEXICO for PROCESSING - where we have the highest rate of FORGERY AND COUNTERFEITING and problems with IDENTITY THEFT - ALREADY, BEFORE this "NEW OUT-SOURCING PROGRAM"???
I know what Paul Revere and Patrick Henry would be doing - AND I AM WITH THEM!
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Posted by: docjim505 at July 31, 2007 3:07 PM
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Yeah, let's starve 'em a LOT! hehehehe
Posted by Count to 10 | July 31, 2007 5:33 PM
Actually, docjim505, its worse than that. It is the already (and idle) wealthy that are the driving force behind increased taxes--which prevents others from joining them. Its not "drag you down to my level" but "stamp you down from my level."
Posted by Ray | July 31, 2007 5:50 PM
"It is the already (and idle) wealthy that are the driving force behind increased taxes
How can the wealthy be the driving force behind higher taxes as they are ones that are least dependent on government services and would, therefore, require less government resources to provide those services?
Taxes are used to pay for the resources the government needs to perform its services. Tax increases are required when government increases it's services. It's the government itself, and the constant increase in government spending, that is the driving force behind increased taxes, not the wealthy.
Posted by Rose | July 31, 2007 5:58 PM
Posted by: Count to 10 at July 31, 2007 2:14 PM
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Don't forget, Capital Gains used to be what low and mid-level income people RETIRED on - til Congress told people they'd only do Capital Gains taxes on ONLY THE RICH.
People who used to sell the family house and put the profit in CDs and rent a small apartment, or get an RV, suddenly were not able to do that anymore. THEN they discovered THEY HAD BEEN "RICH" for having paid off a 30 yr mortgage on the family home - WHO KNEW!
Rich one minute , and living on Social Security alone, the next. Our great fabulous govt at work FOR US! WOW!
WHO KNEW!
Posted by Rose | July 31, 2007 6:06 PM
That way, you could still soak the idle rich sitting on their wealth, but not hold back the productive but frugal.
Posted by: Count to 10 at July 31, 2007 2:14 PM
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You do realize - THAT is both bigotry and also Socialism - Marxism.
It never prospers.
Posted by John N. | July 31, 2007 6:15 PM
That graphic says it all.
Revenue goes down when Capital Gains rates are increased.
So it is imperative to identify other taxes to be raised at the same time we bump the CG rates to offset the decline in revenue, right?
Posted by StargazerA5 | July 31, 2007 7:04 PM
I have a radical suggestion for changing the tax code that would ave everybody a boat load of money, a lot of headaches, reduce federal expenditures, and make the Federalists happy, and cut the wasted effort on constantly arguing about federal taxes.
Make it so that instead of taxing people, the federal government can only get it's revenues from taxing state revenues. Each state would continue to craft its own tax policies, but the federal government would get a flat percentage of all revenues. States would probably need more flexibility around taxes, which would require diminishing some of the commerce clause powers, which might be a detraction.
That would make the states the primary interface for taxes. Imagine not having to fill out a federal tax form each year. Imagine not having to deal with the book keeping and the associated time and fees inherent with the federal tax form. Imagine not having to argue over wether a federal tax is a good tax or a bad tax. The IRS would only have to process 50 tax forms each year, so processing and auditing becomes much simpler.
Taxes would than become local arguements instead of massive federal fights. The federal government could use tax breaks for the states in incentivize instead of sending money back.
I think this would be a winner. What do all of you think?
StargazerA5
Posted by StargazerA5 | July 31, 2007 7:06 PM
I have a radical suggestion for changing the tax code that would ave everybody a boat load of money, a lot of headaches, reduce federal expenditures, and make the Federalists happy, and cut the wasted effort on constantly arguing about federal taxes.
Make it so that instead of taxing people, the federal government can only get it's revenues from taxing state revenues. Each state would continue to craft its own tax policies, but the federal government would get a flat percentage of all revenues. States would probably need more flexibility around taxes, which would require diminishing some of the commerce clause powers, which might be a detraction.
That would make the states the primary interface for taxes. Imagine not having to fill out a federal tax form each year. Imagine not having to deal with the book keeping and the associated time and fees inherent with the federal tax form. Imagine not having to argue over wether a federal tax is a good tax or a bad tax. The IRS would only have to process 50 tax forms each year, so processing and auditing becomes much simpler.
Taxes would than become local arguements instead of massive federal fights. The federal government could use tax breaks for the states in incentivize instead of sending money back.
I think this would be a winner. What do all of you think?
StargazerA5
Posted by docjim505 | July 31, 2007 8:14 PM
StagazerA5;
Having the feds effectively raiding the treasurys of the several states isn't exactly "federalism". While your idea would certainly streamline the federal side of collecting taxes (and put all those IRS employees out of work; can't have THAT), it wouldn't save people that much money. The states would simply raise their own taxes to make up the money they'd have to send to DC. And talk about "fair share" fights! One occasionally hears politicians from large, rich states (California, for example) whining about how much taxes their citizens and business pay TO the feds vs. how much the states get back FROM the feds.
As I and other commenters wrote earlier, we need to stop thinking about ways to make it easier for Uncle Sam to steal from us, and start thinking about ways to keep our own money.
Posted by StargazerA5 | July 31, 2007 10:09 PM
Docjimbo505:
Agreed that the states would have to raise their rates. I dropped that off in some editing and forgot to add it back in. The money saved I was refering to was in paying for the additional accounting overhead of having to prep for the federal taxes and paying for financial advise and filing. That is a multi-billion dollar industry that is completely non-productive to our economy and founded on pure waste.
I think it would be more federalistic since it would shift power to the states because they would be the ones paying, and in paying such large amounts they would have far more leverage than individuals, which would tend to keep the taxes on the states lower and reduce the expansion at the federal level.
The advantage here is that citizens can more effevctively pressure their states to lower taxes or keep them in check than they can the federal government. And for those states that prove immune to that, the citizens would have an easy option to move to another state with a more ammenable tax policy, putting pressure on the over-taxing state in another way.
StargazerA5
Posted by MICHAEL DOOLEY | August 1, 2007 5:20 AM
I believe we are all missing the point. All this talk about revenues and government debt is just a smokescreen. The Democrats really don't give much thought about such things. Raising taxes isn't about feeding the government--although it does make it easier the expand services and programs. The the most part, they are quite content to run up the national debt as long as it is they who use the credit card.
The real purpose in all these tax increases is social engineering. The Democrats are using tax policy to remake America into the country of their design. Whether it is out of their sense of justice or just plain envy, they want to take money from the most productive (however you want to define that) to level out outcomes.
This is why the Democrats appear to be absolutely tone-deaf concerning supply side economics. They don't learn from the lessons of history because it is beside the point to them.
Posted by Mal Carne | August 1, 2007 7:53 AM
You have the straight poop on what constitutes 'real wealth' in your judgement?
How about we start off with something that actually exists in the real world today? Wall Street is currently crashing and burning becuase somebody decided that the promises of low-income workers to pay some bills in 30 years constituted 'real wealth'. Mistake.
I think I'll leave it to the market to decide where the value is.
Nonsense. There's a market value for slaves and kidneys. Should those be freely traded?
Increased liquidity has its own value, even if you don't like who benefits and how.
There's a difference between liquidity and idiocy. While it's valuable to be able to trade some things freely, some things simply should not be treated as currency - like the aforementioned slaves and kidneys. IOUs from people who can't pay probably fall into the category too.
"High risk" investing generally seems to revolve around creative ways of convincing people that things that could or should not have value do have value. Then, oddly enough, all of this "high risk investing" get turned around and invested into mergers... and the control of companies... who actually produce real wealth. Funny, that. (And of course, owning a company is power - the only wealth that really matters.)
In short, Wall Street today has the propensity to rewrite the rules of generating wealth to its own short-term benefit. If they want to do so, fine. But we shouldn't reward such behavior, and a strong case can be made that taxing such behavior heavily is to the country's benefit.
Posted by Count to 10 | August 1, 2007 2:32 PM
"...soak the idle rich...
You do realize - THAT is both bigotry and also Socialism - Marxism.
It never prospers.
Posted by: Rose at July 31, 2007 6:06 PM "
My apologies. I meant that to carry some sarcasm, to point out that higher taxes on the rich are intended as punishment rather than for utility.
The irony, of course, is that the idle rich (the primary movers and shakers of the Dem party) use themselves as a target to convince people to raise taxes, when those taxes leave the idle rich mostly untouched and hurt their opponents, the productive rich (often pro-Republican).