The Rationale Behind Low Capital Gains Taxes

University Of Chicago economist John Cochrane writes:

Intuitively, this is related to the theorem that you shouldn’t tax intermediate goods, or have tariffs for moving goods around the country.  Romney’s income was taxed once, when he made it. It’s not efficient to tax it again, because he chose to save it rather than spend it immediately on an orgy of houses, private jets, and a big vacation for his extended family.

If you made money in dollars, paid taxes, then went to Canada and got $1.20 Canadian, it would make no sense to say “you made 20 cents of income, we’ll tax it.” It makes no more sense to pay taxes again on money that is moved over time. We decry that Americans don’t save enough, the Chinese, the trade deficit and so on. Well, if you want people to save more, stop taxing it.

For this reason, the U.S. Tax code has been slowly reducing the taxation of rates of return. Capital gains and dividends are now taxed less than ordinary income. IRAs, 401(k), 526, and a welter of other devices allow people to save and invest without paying taxes on the rates of return. (It would be much simpler to just eliminate taxes on rates of return, but then the lawyers and accountants would have nothing to do.) Dividends are finally taxed at the same rate as capital gains. Estate taxes have been slowly and chaotically lowered. 

Full post can be found here.

25 Responses to “The Rationale Behind Low Capital Gains Taxes”

  • The rationale is your intuitions. Seems like it would be wrong. Seems like it would be inefficient.

    What matters to me is data. What has been the effect in the collapse of capital gains taxes? Capital gains rates are one part of a broader story that has lead to increases in inequality. Reduces union participation, which allows more wealthy owners to have a stronger bargaining position in wage negotiations. Reduced progressivity of income tax rates. Increases in regressive taxation rates, such as social security. And capital gains.

    So what has been the consequence? Reduced economic growth. All the effects of expanding inequality discussed here.

    We’re setting records in poverty. We’ve emerged from what was called the golden age of capitalism to stagnation. All in all it’s been pretty bleak, except for the top .01%.

    I think this is what happens when you focus on intuitions instead of real world consequences.

  • Not true Jon. In fact, if you care about maximizing government revenue, the capital gains tax should be lower, see here.

  • Why would I care about maximizing government revenue? You shift the tax burden from the rich to the poor, and you really crush the poor by shifting it dramatically, you might get more government revenue. But you’ll harm the poor and the majority of people.

    Sure, taxes on the rich have fallen. Check the chart of sources of revenue at this link.

    The regressive taxes are an ever larger share of federal revenue. Corporate taxes an ever declining share.

    And though income taxes have stayed a constant share of revenue, even the burden of those has shifted more to the poor. If you are worth a quarter of a billion you pay 13.9% total, like Mitt Romney.

    Nice low capital gains rate. Cayman Islands and Swiss accounts. Rich people get their loopholes and make the middle and upper middle class take on the major brunt of the tax burden. Take a look at the effective rates for the various income groups.

    The implemented policies have all been in service to the rich. And by rich I mean the really rich. Not necessarily the 1%. A lot of them pay through the nose. It’s the top .01%. Hedge fund managers, CEO’s, etc.

    And yet the University of Chicago says it’s time to double down. We’ve given the rich everything they’ve wanted over the last 30 years and sent our economy into a tail spin. The solution? More of the same. And on top of that as Bryan Caplan says, we should sing songs to the rich. Tell them how great they are. Give them more money. And when that fails I’ll make a prediction about what they’ll want. More for themselves and less for everybody else.

  • Maximizing government revenue would make all other tax rates lower, everything else equal.

    In other words, we are arguing the same thing.

  • I’m not that much of a online reader to be honest but your blogs really nice, keep it up!
    I’ll go ahead and bookmark your website to come back later.

  • A person necessarily assist to make seriously posts I’d state.
    This is the first time I frequented your website page and to this
    point? I surprised with the research you made to create this particular
    publish incredible. Fantastic job!

  • You ought to be a part of a contest for one of the greatest blogs on the web.
    I will recommend this web site!

  • hi!,I love your writing very so much! percentage we keep
    up a correspondence extra about your post on AOL? I require a specialist on this area to unravel my problem.
    Maybe that is you! Having a look ahead to see you.

  • I like this blog very much, Its a really nice position to read and find info.

  • What’s up, every time i used to check webpage posts here in the early hours in the daylight, as i
    love to gain knowledge of more and more.

  • I’m not that much of a online reader to be honest but your sites really nice, keep it up!
    I’ll go ahead and bookmark your site to come back down the road.

  • Hi there this is kinda of off topic but I was wondering if blogs use WYSIWYG editors or if
    you have to manually code with HTML. I’m starting a blog soon but have no
    coding expertise so I wanted to get advice from someone with experience.
    Any help would be greatly appreciated!

  • I was reading through some of your blog posts on this
    site and I think this internet site is rattling informative!

    Retain posting.

  • It is appropriate time to make some plans for the long run and it’s time to be happy.
    I have learn this submit and if I could I desire to suggest you some fascinating issues or tips.

    Maybe you could write next articles relating to this
    article. I desire to learn more things approximately

  • After looking at a number of the blog articles
    on your blog, I really appreciate your way of blogging. I book-marked it to my bookmark website list and
    will be checking back soon. Take a look at my web site too and tell me your opinion.

  • Have you ever thought about adding a little bit more than just your articles?
    I mean, what you say is important and everything. However
    think of if you added some great photos or video clips to give your posts more,
    “pop”! Your content is excellent but with pics and clips, this site could certainly be one of the greatest
    in its field. Good blog!

  • 1GWHWO lewzcrtfwjld, [url=]ejnpuwfxcsab[/url], [link=]rcuztblegmwn[/link],

  • This is very fascinating, You’re an overly professional blogger.
    I’ve joined your rss feed and stay up for looking for more of your great post.
    Also, I’ve shared your website in my social networks

  • Excellent website you have here but I was wondering if you knew of any discussion boards that cover the same topics
    talked about here? I’d really like to be a part of group where I
    can get responses from other knowledgeable people that share the same
    interest. If you have any recommendations, please let me know.

  • I have read so many posts about the blogger lovers except this
    paragraph is really a good post, keep it up.

  • I don’t know whether it’s just me or if perhaps everybody else experiencing problems with your
    blog. It appears as if some of the written text in your content are running off the screen. Can someone
    else please comment and let me know if this is happening to them
    as well? This may be a issue with my browser because
    I’ve had this happen before. Kudos

  • Can you tell us more about this? I’d want to find out more details.

  • I really like it when people come together and
    share thoughts. Great site, keep it up!

  • Do you have a spam issue on this website; I also am a blogger, and I was wondering your situation; many of us have developed some nice practices and
    we are looking to swap methods with others, be sure to shoot me an email
    if interested.

  • Hey! I know this is somewhat off topic but I
    was wondering which blog platform are you using for this site?

    I’m getting sick and tired of WordPress because I’ve had problems with hackers
    and I’m looking at options for another platform.
    I would be awesome if you could point me in the direction of a good platform.

Leave a Reply