-Submitted by David Drumm (Nal), Guest Blogger
When politicians frame the debate on taxes, higher income taxes on the wealthy are always preceded by the descriptor “job-crushing” and lower capital gains taxes “encourage investment.” Investment is often used as the justification for a tax rate of 15% on capital gains, monies from the sale of stock, and dividends, which are now included in the 15% bracket. For the wealthy, those making $379,150 and above, ordinary income is taxed at 35%.
Is this “investment” justification backed by the data?
The above graph shows the capital gains tax rate in red. Real business investment is plotted in blue. The figure shows a lack of correlation between the bouncing red line and the steadily increasing blue line. High capital gains tax rates don’t discourage investment and low capital gains tax rates don’t encourage investment. As Warren Buffett said:
I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.
Another argument used for low capital gains tax rates is that many middle-class investors are benefited by the lower rates. However, figures show that 70% of the benefits of capital gains tax cuts go the richest 1%. The poorest 60% of Americans get only 2% of the benefits. In reality most of the middle-class investment in stocks is in the form of 401 (k) plans that are tax deferred until retirement. At retirement, they are taxed as “ordinary income,” and don’t benefit from the tax cuts for capital gains and dividends.
But, wait. Aren’t corporate profits taxed twice, once as corporate income and then again as dividends? It’s hard enough to get corporations to pay tax once let alone twice. Two-thirds of all dividends are paid out to tax-free entities such as pension plans and other retirement vehicles. The logic of the “double tax” argument should also apply ordinary income that is taxed again when purchases are subject to sales taxes. Ordinary wage earners get taxed twice when their wages are taxed for FICA and the same wages are taxed as federal income.
It’s time to tax the non-workers the same as the workers.