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August 21, 2011

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Taxing Capital Gains at Ordinary Rates

Posted: 21 Aug 2011 12:24 AM PDT

Jared Bernstein:

Taxing Capital Gains at Ordinary Rates, by Jared Bernstein: Why not tax capital gains as ordinary income? That's an old chestnut among those of us who believe that the differential between tax rates on different types of income causes more harm than good. ...
 The usual objection to increasing the rate on capital gains—that's the money you get when you sell an asset for more than you paid for it—is that it will discourage investment. ... There's been considerable academic work on this question, but tax expert Len Burman ... called the academic evidence "murky, at best." ...
There are a few economic principles that we consistently get wrong in ways that do lasting damage to our economy and diminish our future. At the top of this list are arguments about large behavioral responses to changes in tax rates. I don't think it's zero, but I've simply never seen compelling evidence that tax increases significantly hurt growth, labor supply, jobs, wages, or that rate decreases provide much of a boost the other way. And when you factor in the benefits of the investment and services government provides—something the literature tends to ignore—the hyper-responsiveness arguments are even less compelling. ...
So, in the interest of better, simple tax policy that diminishes a distortion in the system while raising some much needed revenue, we should seriously consider taxing capital gains as normal income. I know—not exactly consistent with our current politics...

links for 2011-08-20

Posted: 20 Aug 2011 10:01 PM PDT

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