Capital Gains Tax Rates Hollow the Economy

Let’s look at tax law. Remember Romney’s tax returns. His average tax was approximately 15%. That’s the rate for capital gains. But for anything else earned above roughly $400,000 the rate is 35%. I’d love to reach that rate, to earn enough to pay 35% on some little fraction of my income. Alas, I don’t.

If you receive big bucks as salary for running a corporation, perhaps one that manufactures things, you’d be taxed 35% on everything over $400,000. But if you go into finance, buying and selling securities, the maximum rate is 15% on anything held for a year. That’s 20% less than if you made something and drew big bucks in salary. Or if you buy and sell businesses like Romney. Hold businesses for a year and anything you make on the sale is taxed at 15%.

In other words, our tax code doesn’t want you to make anything. It wants you to buy and sell stuff. Doesn’t matter what you buy and sell – overseas investments, 15%; pornography companies, 15%; make money by liquidating companies and closing them down, 15%. The tax code is neutral about what you buy and sell, whether you have done something good or bad with your investments, as long as you don’t try to keep the business and steer it toward making a profit.

Life can be a bit more complicated. Many companies try to pay people in capital gains. But the path to wealth is to trade in barely over a year.

So if you want to make money, are you heading for the most productive parts of the economy? Or are you heading to the financial sector, not the portion that makes long term loans to small businesses to get them on their feet, but the portion of the financial sector that churns the market looking for relatively quick bucks.

Peter Drucker has been one of our most respected writers on management. He wrote in one very famous book that if you look at where the best and the brightest students are going, you know what industry will be leading the country in 20 years, the time it takes for them to rise to the top. One example, the decline of railroads between the World Wars as other industries developed greater cache among the young.

And what industry is getting the best and the brightest now? Finance. With the aid of the federal tax code and its special treatment of capital gains. Even while countless of us have been saying for years that we are hollowing out the American economy, losing the ability to compete, losing investments to overseas industry. The problem isn’t that the American worker, the low guys on the totem poll, are too greedy. The problem is that the tax structure favors trades of paper, not manufacturing and jobs.

The Republicans have been insisting on lowering the capital gains rate – indeed they’ve been arguing for an end to the capital gains tax entirely. Another example of the Republican effort to hollow out the American economy so only their rich contributors have anything to gain.

— This commentary was broadcast on WAMC Northeast Report, February 28, 2012.

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