Edited on the fly
Tuesday, January 31, 2012
Wednesday, January 25, 2012
The myth behind lowering capital-gains taxes | Macro, Micro, Minnesota
Capital gains taxes are in the news. Mitt Romney released his tax returns this week showing he had an effective tax rate of 14 percent for 2009 and 2010 because half of his income came from capital gains. By contrast, Newt Gingrich, who released his returns earlier, paid 31 percent because most of his income came from wages and salaries.
I'm not a tax accountant or tax lawyer so I won't go into the gory details of the tax code or the nitty-gritty of capital gains taxation. Rather, let's take a look at the economics of capital gains taxes.
A capital gains tax is paid on the increase in the value of an asset that you sell after holding it for at least one year. For example, suppose that you buy a share of stock for $100 in December of 2010 and you sell it for $105 in January, 2012. You have a capital gain of $5 on the sale.
A capital gain is just like an increase in labor income because it allows a household to increase its consumption. Continuing the example, you can go out and spend that $5 capital gain and still have $100 of stock just like you did on Jan. 1, 2012. (Note that to keep things simple I'm ignoring inflation. We could add it in but it would just muck up the example without adding any insight.)
And, just like your labor income, there is something else you could do with that capital gain: you could forgo buying anything and save it. When households do this the pool of resources for capital investment deepens and helps increase our productive capacity.
A quick history of capital-gains taxes
So, if capital gains allow people to either spend more or save more, just like any other kind of income, why are these types of income taxed at disparate rates, as shown in the graph below.
For instance, the top income tax rate in the 1950s was 90 percent while the capital gains rate was 25 percent. Why the difference?
The idea from the 1950s to the 1980s was that people who earned their income from wages and salaries spent most of their income while those who received most of their income from capital gains tended to save those gains. Thus, keeping taxes low on capital gains would promote saving while high rates on top incomes would not affect saving much.
Economists, however, argued against this idea throughout this period. Evidence mounted that high marginal tax rates on labor income affected saving (and hours worked as well), and that saving rates were roughly the same regardless of family income sources. So economists called for eliminating the distinction between ordinary-income tax rates and capital-gains tax rates.
The 1986 tax reforms, enacted under President Ronald Reagan, embodied this idea. The graph illustrates this in 1986, when the income tax rate and the capital-gains tax rate are equal. The reform not only eliminated the labor income-capital gains distinction, it eliminated loopholes and many deductions, reduced the number of tax brackets, and lowered rates across the board.
Why do we care?
The economic case for lower capital-gains taxes is that they foster increased saving and faster economic growth. Unfortunately, neither of these theories is borne out by the data.
First, household saving fell from 1981 to 2009, despite changes in capital gains tax rates:
For instance, the decreases in capital gains rates in 1998 and 2003 don't register as increases in household saving.
Second, the economy did not grow faster after reductions in capital gains taxes. The chart below shows the average annual growth rate of real GDP since 1954:
Consider the period from 1998 to the present. Capital gains taxes fell in both 1998 and 2003, yet the GDP growth rate fell steadily over this same period.
This surprised many policymakers, who thought that capital accumulation was the critical ingredient in economic growth. It did not surprise most economists, however, who have known since the 1950s that capital formation is second to what we call total factor productivity (TFP). TFP is the ability to improve our use of existing resources, and this is typically twice as important to economic growth than is increasing the capital stock.
Think about raising the rate
So, where does this leave us? First, it tells us that reducing capital gains tax rates to promote saving and growth doesn't work. Eliminating the distinction between capital income and wage income is not going to bring the economy to a screeching halt.
Second, it provides another way to think promoting economic growth. We know that increases in human capital formation, through improved health and education, are an important part of total factor productivity growth. We could tax capital gains at the same rates as wages, and then use the additional revenue to fund investments in pre-K education or health promotion. Or, if we are really concerned about deficits and debt, we could use the proceeds to deal with those problems.
Mitt Romney and others have benefited greatly by paying a lower rate on their capital income than others do on their labor income. Rectifying this difference should be part of comprehensive tax reform.
Tuesday, January 24, 2012
Ron Paul Supporter Likes The Way Paul Tells It Like It Has No Chance Of Being
RICHMOND, IN—Self-proclaimed strict constitutionalist and freethinker Rick Crawford told reporters Monday he is supporting Ron Paul in the 2012 Republican presidential primaries because of the way the candidate looks people directly in the eye, does...
Time to reverse course: 'We' are not broke -- and Minnesota can do more to educate our young | Community Voices
Time to reverse course: 'We' are not broke -- and Minnesota can do more to educate our young
By Jeff Kolnick | Tuesday, Jan. 24, 2012
Recent reports have indicated that accumulated student loan debt now exceeds $1 trillion and is greater than the nation's combined credit-card debt. In response to this bad news, we hear the usual: We are broke and must adapt to the new normal of diminishing resources and austerity.
With the Legislature now in session, we have a chance to reverse course on what is a profound generational betrayal of our young people. I refuse to believe that "we" are broke or that we are living in a period of diminished resources. I am forced to turn to the facts rather than the fantasy that passes for conventional wisdom these days.
America is a richer nation now than it was when I was an undergraduate, 1977-1982. Back in those days, another period of recession and high unemployment (remember stagflation?) my college tuition was much lower. I am from California and began my career at Fullerton Community College, where tuition as free.
Did he say free? Yes, free. I paid absolutely nothing for three years of excellent education with outstanding faculty. You can adjust for inflation all you want, but free is free.
After I transferred to UCLA, I paid a whopping $1,657 for two years of quality education. Imagine, a BA degree awarded from an elite university for less than $1,700.
Minnesota used to have low tuition too
But that’s California, you say – a state run by hippies. Well, Minnesota also used to have low tuition. According to the Minnesota Office of Higher Education, between 1993 and 2009, a period when per-capita income in Minnesota increased from $22,302 to $42,549, tuition at the University of Minnesota went from $3,421 to $10,756. At State Universities the increase was from $2,521 to $6,373, and at two-year schools the increase was from $1,950 to $4,548. These increases were during a time when the wealth of Minnesota nearly doubled.
But heck, that was Minnesota. Was America a richer nation when I went to college? Were we somehow less broke? Of course not. As the chart below indicates, we were a poorer nation by every measure in 1980 than we are now. In 1980, in constant dollars, our per capita GDP was $25,640 and today it is $42,204. Looked at another way, the United States is more than twice as rich today as we were in 1970.
| Year | Real GDP (millions of 2005 dollars) | Real GDP per capita (year 2005 dollars) |
| 1970 | 4,269,900 | 20,819.74 |
| 1975 | 4,879,500 | 22,592.27 |
| 1980 | 5,839,000 | 25,640.46 |
| 1985 | 6,849,300 | 28,717.52 |
| 1990 | 8,033,900 | 32,112.35 |
| 1995 | 9,093,700 | 34,111.44 |
| 2000 | 11,226,000 | 39,749.59 |
| 2005 | 12,623,000 | 42,612.30 |
| 2010 | 13,088,000 | 42,204.92 |
So I ask you, where are the diminished resources? Where is this broke nation? To find out who is broke you can visit our state colleges and universities, where students are paying super high tuition because my generation has decided to slam the door shut on the very opportunity that allowed me to become an educated citizen.
Today, Minnesota state policy (Minnesota Statutes 136F.01) is that the state will fund 67 percent of the cost of a college education. In fact we are paying only about 30 percent of the cost of a college education, and students are paying the remaining 70 percent. MnSCU institutions are incredibly efficient. MnSCU appropriations for this biennium are the same in real dollars as they were in 1999; we are educating many tens of thousands more students, and the total cost of educating a student per capita has remained roughly the same.
Reneging on commitment started with Pawlenty
The state’s decision to renege on its commitment to paying two-thirds of the cost of a public education began under the Pawlenty administration. As recently as 2002, the state honored the law and only began its generational betrayal under the former governor, a man who, like me, needed and used public higher education to jumpstart his career. [PDF, page 45]
It is time to refute the lie that we are broke! WE are not broke! Some of us are broke, some of us are in debt and going deeper into debt. But the United States is a richer nation now than it was 30 years ago, or even 10 years ago. The trouble is that all of the money has gone to the top 5 percent and those at the top are not as generous today as they were 30 years ago when I got a world class education for $1,657.
America has the money to rebuild its infrastructure and educate its citizens. In 1955, when we built the interstate highway system and expanded opportunity in public higher education, per capita GDP was $15,128.12,not the $42,204 it was in 2010. In those days we acted like a nation that looked out for one another, and we prospered together. Today we act more like a pack of wolves, except that wolves do not eat their young.
Jeff Kolnick is an associate professor of history at Southwest Minnesota State University.
