Roundtable Question 3: Capital Gains Taxes
The debate sponsored by my publisher, Energion, has become a roundtable. Joining Bob Cornwall and myself, in the discussion are Arthur Sido, Allan R. Bevere, and Joel Watts. To all, welcome. Also, if you have a question you would like the round table to address, these can be submitted to pubs@energion.com or via comments at Energion.net
This week’s question is: Should the capital gains tax be changed (raised, lowered, eliminated)? In very general terms, how would this relate to your general view of tax policy?
From my perspective, this is pretty easy. It should be at a minimum lowered significantly, with serious consideration being given to eliminating it all together. This is because economic growth requires investment, and investment, as the legalese of many financial commercials make clear, involves risk and the past performance is not indicative of future results. It is the threat of loss that makes capital gains income different than regular wages and salary income.
There is another factor that goes to the heart of the question: What is the purpose of a tax? Is it to raise the revenue needed by the Government; or should a tax serve some other purpose such as a means of social control, or social engineering. I would argue that its purpose should be to raise money. Unfortunately this has not been the practice, and the results have been, in my opinion, harmful.
The problem with using a tax for other goals is that government’s need for money can never be truly ignored, and can result in unintended consequences. For example, tobacco taxes were seen as a way of reducing smoking. But as it became clear that tobacco taxes were relatively easy to raise, it also became an easy source of revenue. Now that smoking has declined, the end result is that, because of the demographics of smoking, it becomes a very regressive tax feeding off the addiction of those least able to afford it. In addition, as smoking declines, government programs dependent on smoking taxes for their existence suffer as a result. In short, governments become addicted to smoking taxes as much as smokers are addicted to cigarettes.
So for me the primary question concerning any tax is how effective is it in raising revenue. Since I am also a strong believer in liberty, I want taxes that will raise the most money with the least impact. Finally I have one additional criteria, equity; but this is a somewhat different concern than that summed up in the common question of whether some are paying “their fair share.” Rather I am concerned that any given tax is applied equally. As I detail in chapter 2 of my book Preserving Democracy, one of the greatest dangers in a democratic form of government is the ability of the majority to impose tax burdens on a minority, burdens that they do not share themselves.
So how does this apply to the capital gains? I believe capital gains to be one of the least effective taxes, when it comes to raising money. This can be clearly seen in the example from my book concerning the cut in the capital gains tax from 20% down to the current 15% enacted under Bush. As a result of this tax cut, the CBO projected that revenues would correspondingly fall from $186 billion over the following three years down to $147 billion. Yet instead of losing $39 billion as projected, the cut in taxes stimulated such growth in the economy that the government actually brought in $216 billion, $30 billion more than had been projected before the tax cut.
In actual fact, the government revenues increased even more. This is because the by freeing up investment the economy grew, and as a result all government revenues, not just capital gains revenues, grew.
This is why capital gains taxes are so harmful, and why serious consideration should be given to eliminating them all together. A tax on capital gains is a tax on investment, which is ultimately a limit on economic growth. Limiting growth mean fewer jobs and lower pay. A study done by the American Council For Capital Formation found that if Capital Gains tax rates were raised from their current 15% back to 20%, the result would be a further job loss of 231,000 per year. If, on the other hand, it was eliminated the Economic growth would be 0.23 percent higher, resulting in an additional 1.3 million jobs per year. Again this is right in line with the historical evidence of what happened with previous cuts in capital gains taxes.
The study did find that a complete elimination of the Capital gains tax would “cost” the government about $23 billion per year in revenues. But with that many additional jobs being created, I believe this would more than be made up by the reduced need for government services, as people moved into the workforce and up the economic ladder.
So again this is a pretty easy question, and we should cut if not eliminate capital gains taxes.
Responding to Cornwall: Three Important Issues
As I read through Bob Cornwall’s reply to this week’s question, I was initially struck by how much common ground there was, at least in terms of the issues themselves, and yet as I thought more about each one, the more that I could see that we differed considerably.
Income Disparity
This is an area where I have been critical of my fellow conservatives, and I do think this is a problem that should be addressed. The key questions, however, are how and by whom? While I do think that government can play a very limited role, frankly I think that their actions to date have only made the problem much worse. For example, past government actions and threat of actions in regards to the salaries of CEOs basically resulted in CEO compensation being moved from direct wages to the much more lucrative stock options and bonuses that are now the source of much of the problem.
As for the issues of equality of opportunity vs. outcome, and the inherent problems of government attempting to enforce equality, see the discussion of this in chapter nine of my book Preserving Democracy. In short, trying to enforce outcomes is impossible and the attempt comes at a very high cost to liberty. Unless stopped the result is totalitarianism. Thus when it comes to income disparity as a political issue, I get very nervous.
Immigration Reform
This is a hot button issue for both the left and right. More importantly, I believe the solution is actually quite simple and has the broad support of the American people, but it requires an initial step that the left refuses to accept: Seal the border. Under Reagan we tried the grand compromise of sealing the boarder in exchange for granting amnesty. The amnesty was granted, but the boarder was left open and now the problem is worse than ever. As a result, most conservatives approach this issue with the attitude of “fool me once…” They are no longer interested in promises or pledges; they want the boarder closed to new waves of illegal immigration. (And no this does not mean 100%.)
If that were done with any sort of confidence, the rest, i.e., what to do with those already here; how to increase immigration quotas; creation of a guest worker program for those who want to come here to work, but who do not want to immigrate; etc., could all be solved fairly easily, or at least easily in terms of any government action, as these are areas where a broad bi-partisan support could be established.
This is one of the things that was so troubling about Obama’s recent actions on the Dream Act, as this was one of the very few areas where a bi-partisan consensus could have been built without first sealing the boarder. In fact, Senator Rubio had been working on a bi-partisan compromise on the Dream Act and was getting close. While these things are never done until they are done, I was fairly confident that he was going to succeed, and may very well have done so by now.
Then “President Obama swooped in with a DREAM Act-like executive order” which ended any chance at working out a compromise. Not only was it clearly unconstitutional (if for nothing else, it creates a new legal classification without any actual law to support it) and is almost certain to be overturned by the courts, such a ruling is unlikely until after the election. Frankly it is hard to see this as anything but a nakedly political move to short circuit Rubio’s efforts, lest a Republican bring about a compromise that Obama had failed to even seek. After all, if President Obama was really interested in working out a solution, why not partner with Rubio to get something done?
Finally, there is a moral component to this issue that is often ignored on the left, which is the issue of justice. It can be seen in the example of two students here on student visas. Both want to live in America. When their visas expire, one returns home and applies to immigrate back. The other just stays here illegally. Where is the justice in rewarding those who broke our laws while those who chose to follow the law, are left waiting in line? I have heard more than one legal immigrant wonder why they put up will all the hassle of working with the INS, as things would be so much easier if they were willing to break the law.
Health Care
Again this is an issue where there is some agreement over the problem. Despite claims that conservatives want to return to the old system, few were actually happy with system before ObamaCare, aka the Affordable Care act. But, there is no agreement on what ObamaCare will do. While Cornwall thinks that the Affordable Care act “is enough to fix a broken system” I could not disagree more. We can get into the details later, but there is no doubt in my mind that ObamaCare will have (and in some cases already is having) a devastating impact on the health care system in this country. It will result in more, not less, people without health care coverage, and the health care they do receive will be of lesser quality. In the end there will be an even greater disparity in the delivery of health care in this country than before ObamaCare.
This is before we even begin to consider our ability to afford the so called Affordable Care Act. Like so many other programs, the cost of ObamaCare has already exploded way beyond the estimates used when it was passed. In short, we simply cannot afford the Affordable Care Act and there is no compassion in an empty promise.
The Big Three
Week 2 of the debate starts with this question: What are the three most important issues a voter should consider this year in choosing a candidate to vote for at the federal level (President, Senate, House of Representatives)? Why are these issues critical?
First and foremost has to be the economy. The Democrats claim this was all Bush’s fault and that the current problems are simply because Bush messed things up more than they had thought. As I detail in my book, and summarize here, this is just false. Other Presidents have inherited recessions from their predecessors, but took actions that helped the economy turn around, including the previous President Bush. President Obama’s actions made things worse. By massively expanding the role of the federal government, he has further stifled what was a struggling economy. The two prime examples of this are ObamaCare, and the Dodd Frank banking bill. But most levels of government have become increasingly burdensome on businesses. Moreover, the massive increase in the deficit, and the resulting debt, in and of itself are dragging down the economy.
The bottom line is that Government is going bankrupt, it cannot even meet it current promises much less the increased promises of the future. The cities in California such as San Bernardino are just the tip of the iceberg. The state of California not only has a huge and growing deficit, it also has over $500 billion in unfunded pension liability. Social Security and Medicare are both in the hole and going bankrupt. The federal deficit is over $1 trillion each year. The Federal government cannot borrow enough to meet its needs and so has been printing so much money that the last time I checked we had tripled the money supply. Unless changed, I believe within the next 3-5 years, maybe 10, these financial bills will come due, and when they do we will look back at 2007-12 as the good old days.
Whether you like Ryan’s plan or you hate Ryan’s plan, at least he has a plan. Obama has none. The closest Obama comes to anything that might resemble a plan is his proposal to let the Bush tax cuts expire for those making over $200K, but that is not a plan. He has had four year now to produce one, and the only thing he has done is throw stones that those who are actually trying to solve the problem. Yet more promises of hope and change in the future will not cut it.
While the domestic problems overshadow foreign policy, things are hardly better there. Some key issues are the arbitrariness of his actions; his intervention in Libya vs. his lack of support for the protests in Iran. His insulting of friends such as Great Britain, Poland, and Israel, while reaching out to enemies. His cluelessness about the so called Arab Spring and support for the rise of the Muslim Brotherhood in Egypt. His apparent desire to reduce America’s leadership role in the world, without regard for who will take our place? China? Russia? The UN? I think, like the Presidency of Carter, once the economic problems are well behind us, the Foreign policy problems caused by Obama will still confront us for decades.
The third area is hard to exactly label. Part of it is faithfulness to the office, part is integrity, part is just plain honesty. In any democratic system, a large part of its functioning is the sense among those in power that they are part of something bigger than themselves, that being elected is more than getting the power to do what you want. While the checks and balances in the Constitution go a long way to establish our government in the end they are just words on page. To be effective, those in power must see them as something to be followed, not something to be gotten around.
To be clear this is not a completely an us-vs-them issue and, as in all areas, there are saints and sinners in both parties. But that said, President Obama, Majority Leader Harry Reid and Minority Leader Nancy Pelosi have repeatedly shown a callous disregard for any of the conventions of democratic government. When Pelosi was Speaker of the house, for the first time in our countries history committees were meaningless as were open debates, and amendments were not allowed. Bills were written under her control, and submitted on a take it or leave it basis. For whatever faults they may have, when the Republicans regained control, they restored the House back its normal functioning, (or dysfunction?) .
The Democrats in the Senate under Reid have been little better. In violation of the law, they have refused to even submit a budget, much less pass one in four years. Bill after bill has been passed by the House and come to the Senate where Reid refuses to even bring them up for a vote.
But the worst and most dangerous offender has been President Obama, who has shown an increasing disregard for the law and the Constitution. When I wrote in my book that Obama intended to ignore Congress and rule by Executive order, I never envisioned he would go this far. While many examples could be sited, I will just state three. The first is his unwarranted claim of executive privilege. (He claims he and his staff were not involved in Fast and Furious. Even if they were, Executive Privilege does not apply in cases of criminal wrong doing). Second the use of “recess appointments” when the Senate is not in recess. Third the creation new laws such as with his granting waivers to children brought to the country illegally and thereby creating a new class of people beholden, not to the law or government, but to him personally.
That individual politicians would abuse their power is not surprising and examples can be found on both sides. What is most disturbing about the current Democrats in office is that they, as a party, defend such actions. When it became clear that Nixon had violated the law, Republicans went to the White House and asked him to resign. Where is the outrage from Democrats? Given their acceptance of the abuse of power, just as long as it is from other Democrats, how can they be trusted with control over the government?
What Really Caused Our Current Economic Problems
For quite some time a major argument of the Democrats has been to blame Bush for our current situation. Now this is being expanded to claim that to elect Romney and Ryan would be a return to same policies that got us into this problem in the first place. While a common line from the left, as I detailed in my book Preserving Democracy, this ignores what actually happened.
In short (and see my book for the details) the financial crisis in 2008 was brought about by 4 factors. 1) The housing bubble which was caused by government housing policy going back to the late 70s and that punished banks that did not loosen their lending practices to make the riskier loans demanded by the government. 2) New financial instruments developed to satisfy the government’s push for looser home loan practices. Leading the way in this area were Fannie Mae and Freddy Mac. These instruments were then put into the market with the vague backing of the federal government, and once accepted became the norm and were soon used by others. 3) These first two caused the housing bubble and as the bubble grew it produced the typical loose standards and excesses common to all finical bubbles. All three things came to a head in 2007 as the bubble began to burst.
While you would never know it from the media, it is just a fact that Bush and the Republicans repeatedly tried to fix these growing problems, but they were blocked by Democrats, who instead attacked the the regulators trying to point out the problems and accused Republicans of trying to deny housing to the poor. The last major effort to avoid this crisis was in 2005.
Once the Democrats won control of the Congress in 2006, any hope of averting growing problem was gone. So while the claims that this was all Bush’s fault may play well with President Obama’s supporters, they don’t quite line up with the facts of what actually happened. Still with all that, as the bubble burst the indications were that the recession that followed would be a mild one, and it very well may have been, except for the last item.
4) Late in 2007 the government accounting board mandated a change in the accounting rules imposing mark to market accounting. It was this change in the rules that took what looked to be a mild recession and turned it into a major fiscal crisis. Again for the details see my book, but this is why TARP and the various stimulus bills did not work, for they did not address the actual problem. By the time the problem was realized and the rule repealed in April 2009, the damage had been done.
Thus it is simply false to claim that Romney and Ryan would be a return to the policies that caused our current problems. While Bush is by no means completely blameless, after all his administration came up with the initial response of bailouts and TARP, he at least tried to address the root causes of the housing bubble, which was behind the recession. Still, I do not believe either party was really behind the Mark to Market rule which caused the worse problems. Frankly this may be one of the reasons its role is frequently overlooked, as there is no political advantage in pointing to Mark to Market, since neither side can really blame the other side for this.
Responding to Cornwall: Ryan
In his evaluation of the Romney-Ryan team Bob Cornwall, made a number of points, but I believe that many of them will be better addressed later on, as I am sure the issues will come up again and probably in a more direct fashion. So here let me address a couple of his underlying assumptions. If I believed what he said was true, in particular that Romney and Ryan would “balance the budget on the backs of the poorest Americans” then I would probably agree with him, but I don’t.
Perhaps the biggest disagreement would be the seeming automatic equating of a government program for the poor with helping the poor. Again we agree on the goals, i.e., reaching out to, and helping those in need. Where we disagree is over whether or not existing government programs actually do that, and probably more importantly, whether or not government programs, particularly the type favored by Obama and the Democrats, are even capable of doing that.
To be clear, this is not the same thing as claiming that Government programs never do any good, or that government has no role at all. The real answer is far more complex, with a myriad of qualifiers. But we cannot just look at the promises made by those in government about what a program is intended to do; we must also look at how effective it is, and compare this to the costs, both direct, and indirect. We must look at both the good a program does and the harm that a program does, and whether or not there is a better way. It must also look and both the short and long term effects in a way that considers the entire individual.
We will be getting into a lot of the details in the coming weeks. But the bottom line for me is that a lot of what government does results in far more harm than good.
I believe this comes to the emphasis on both truth and love. Our compassion must be based in what actually works, and not just in our desire to love.
