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TMFBro (< 20)

Are lower taxes on gains and dividends good for the economy?

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August 10, 2010 – Comments (7)

Like many people, I'm reading a lot about whether letting the 2001 and 2003 tax cuts is good or bad. Unlike many people, I haven't made up my mind yet, and am working through it. I'm posting some thoughts here in hopes that you, dear reader, will offer some of your own. 

I'll start with Glenn Hubbard's Wall Street Journal article, which argues that capital and dividends shouldn't be taxed at all. Hubbard (who was chairman of the Council of Economic Advisers under President G.W. Bush) says that " There are at least four channels through which Mr. Bush's tax reform (proposed and passed) raised the long-run productive capacity of the economy—that is, increased the size of the pie." 

Is it me, or is it hard to argue that the U.S. economy hasn't done so well over the past several years? Yes, GDP has grown, but on the whole I don't find the economy of the 2000s as compelling evidence of the power of any kind of policy.

Also, when it comes to dividends and capitals gains, I wonder what percentage are actually taxed. A huge percentage -- perhaps the majority? -- of stocks are held in IRAs and 401(k)s or by institutions (such as pension funds and endowments) that aren't taxed. I suspect that a minority of Americans actually pay taxes on dividends and capital gains, and, yes, most of those people are likely wealthier. (If you have evidence to the contrary, please let me know.)

Finally, I wonder why investments should be taxed at lower rates than labor? Why is one given preferential treatment over the other? They're both important.

Post your own thoughts, links to studies, etc., below.

7 Comments – Post Your Own

#1) On August 10, 2010 at 11:03 AM, truthisntstupid (91.77) wrote:

I don't use a tax-advantaged account.  And I'll pay taxes on the dividend income and capital gains I generate.  Even if they increase, it still won't hurt me too bad.  Maybe it should increase.  Won't bother me.  I'll still be better off than if I didn't have the additional income.  I don't make a lot of money and I invest for income to bring a little more money in both now and in the future.  At my income level, my taxes won't go up much anyway.  My quarterly check from MO for $25 does make a signifant contribution to my income the week I receive it, as does all my other dividend checks when I receive them.   No whining here.

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#2) On August 10, 2010 at 11:14 AM, FracturedVision (< 20) wrote:

To your point, any reduction in taxes will be good for the economy since government spending became uncoupled from tax revenues a century ago.  A reduction in revenue through lower tax rates will not impact the federal budget at all. 

The question then becomes why tax dividends and capital gains at all, which should be clear: to collect tax from the wealthy.  A lot of the US individual income tax comes from those who are wealthy enough to live on their investments alone with no other income.

 However, to revive the private sector, this may be the best sacrifice the government can make.  The additional discretionary spending by the wealthy would be a huge boon as the trickle down effect feeds into different industries and not just banking and housing.

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#3) On August 10, 2010 at 11:15 AM, AbstractMotion (54.47) wrote:

I think it really comes to encouraging investment from abroad.  Having lower taxes definitely makes the country look more appealing to foreign investors as they can get a higher net yield if all other things are equal.  There's an argument that lower taxes on labor attracts better talent, but live in an environment where globally labor is abundant, if not over abundant.  That definitely lowers their leverage politically.  I wouldn't argue that this is necessarily a healthy balance, but it's what we have currently.

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#4) On August 10, 2010 at 1:07 PM, Melaschasm (56.28) wrote:

The main change was to treat dividends the same as capital gains.  I think that makes sense.  Why should shareholders benefit more for stock buybacks than from dividends?  Either method of using corporate profits servest the same basic purpose.

The secondary issue is the treatment of capital gains (and maybe dividends) to the treatment of wages.  It is not easy to compare the tax rates, since capital gains and dividends are a second tax on income that has already been taxed at the corporate tax rate, while wage taxes are more of a one time tax. 

While the details may not be easy to understand the economic impact treating the different sources of income in a different manner from a tax standpoint is relatively straightforward.  If you give a tax advantage to one type of income, you will distort the markets, resulting in a less than optimal result.  Or from another viewpoint, you should put higher taxes on the behavoir you want to punish, and lower taxes on the behavoir you want to encourage.  So the question becomes do you want to punish investment or do you want to punish labor?

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#5) On August 10, 2010 at 5:30 PM, leohaas (32.73) wrote:

"The secondary issue is the treatment of capital gains (and maybe dividends) to the treatment of wages.  It is not easy to compare the tax rates, since capital gains and dividends are a second tax on income that has already been taxed at the corporate tax rate, while wage taxes are more of a one time tax."

Not quite true. Most companies do not pay any tax. All companies reduce their tax burden significantly by lobbying for and obtaining exemptions, loopholes, and so on.

But let's make a deal: we abolish all business taxes, and treat all personal income, regardless of source, the same. $100 income from labor is the same as $100 income from capital gains is the same as $100 income from dividends!

While at it, we create a truely flat tax (not the fake flat tax that replaces only income tax, but one new tax replacing both the progressive income tax and the regressive social security tax). All deductions go, no exceptions.

Filling out your tax return will be very easy, and our businesses will end up with a competitive advantage over foreign businesses located in countries with a business tax. The lobbying and tax preparing industires die (just add a way we can do the same to lawyers and politicians, and everyone will be happy).

How 'bout that?

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#6) On August 10, 2010 at 5:37 PM, devoish (97.60) wrote:

"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration." - Abraham Lincoln

 

 

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#7) On October 04, 2010 at 6:52 PM, TMFHockeypop (< 20) wrote:

1.  From my perspective all tax considerations should start with an elimination, or at least properly tying AMT to some reasonable measure of inflation.  That screws up all discussions.

 2.  If you do THAT for the middle and upper-middle class then you can argue either the elimination of the Bush tax cuts or the Obama plan from some more reasonable revenue raising basis.

 3.  It's the double taxation of corporate revenue that again is the issue.  No one can explain the corporate loopholds, but I haven't seen that the vast majority of corporations are avoiding all taxes.  But either I own the corporation though stock ownership (and pay money that way) OR I don't.  Last I saw dividends were paid after corporate tax, so it would be nice to do something consistently. 

4.  And to your point Robert, I'll figure out the lowest tax implication, as will the corporation.  If taxed at regular rates you drive it into tax deferred until retirement.  If not taxed at all I'll invest it in after-tax accounts.  I understand that it is a tax and policy decision, but at least be consistent.

5.  Flat tax?  That makes WAY to much sense to ever get done.  Just saying ....

 

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