Facebook Twitter LinkedIn

Jeb Bush recently presented some really sensible ideas on tax reform. For years I’ve been complaining that we tax equity financed investments at much higher rates than debt financed investments. Not only does that make no sense on either equity or efficiency grounds, it also makes our financial system more unstable. One reason the 2008 financial crisis was worse than 2001 is that the tech bubble was more about equity and the housing bubble was more about debt. (Of course NGDP was the main reason it was worse.)

Bush proposes to cut corporate tax rates to 20%, switch to the territorial system used in other countries, allow the expensing of capital investments, and make up (at least some of) the revenue by no longer allowing the expensing of interest costs. Finally, debt and equity would be on a level playing field. And there’s lots of other great stuff—eliminate the marriage penalty, no more AMT, no death tax, etc., etc. But rather than a top rate of 28%, I’d rather see 70%, combined with unlimited 401k privileges. Still, a great proposal.

And now to go from the sublime to the ridiculous. Hillary Clinton is proposing a capital gains reform that is so foolish that even the very liberal Massachusetts legislature eventually abandoned the idea. There would be a sliding scale of capital gains tax rates. Here’s Alan Reynolds:

Hillary Clinton’s most memorable economic proposal, debuted this summer, is her plan to impose a punishing 43.4% top tax rate on capital gains that are cashed in within a two-year holding period. The rate would drift down to 23.8%, but only for investors that sat on investments for six years. This is known as a “tapered” capital-gains tax, and it isn’t new. Mrs. Clinton is borrowing a page from Franklin D. Roosevelt, who trotted out this policy during the severe 1937-38 economic downturn, dubbed the Roosevelt Recession. She’d be wise to consider how it played out.

It’s scary that Clinton’s advisers are so brain dead on economics that they think there is some public policy purpose that would justify this nonsense.

We had this for a few years in Massachusetts (back in the 1990s, I seem to recall) and it was a nightmare. You’d get all these complex statements from mutual fund companies about how many cap gains were under one year, or 1 to 2 years, or 2 to 3 years, or 3 to 4 years, or 4 to 5 years, or 5 to 6 years, or more than 6 years. Then for each one you had to laboriously put the amount into the correct category on the form. If you owned 10 funds, you dealt with 70 calculations. Eventually Massachusetts gave up on the silly idea. And now Hillary Clinton wants to revive it? Why?

PS. Don’t assume from this post that I lean toward the GOP. On the most important issues facing the country I probably lean slightly toward the Dems, although my actual views are nothing like either party.

PPS. Couldn’t savvy (and wealthy) investors just use derivatives to lock in gains, without selling? Will this be like the estate tax, where only the suckers end up paying?

PPPS. Dilip just informed me that Larry Summers is now blogging. Instant reaction: Larry Summers is a very, very, very talented blogger.

PPPPS. I have a new post on the sticky wage model over at Econlog.

Facebook Twitter LinkedIn

Tags:

This entry was posted on September 09th, 2015 and is filed under Fiscal policy, Supply-side economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



