Monday, November 12, 2012

On Pragmatism and Hope: Wingnuts Losing their Nuts?

 Cross-posted at

With President Obama's re-election, the hard wall of reality has met the Republican party ideology head on as GOP leaders are rethinking their strategy in alienating huge constituencies (hispanics, women, the middle class) in order to satisfy what essentially amounts to the old white guy voting block.  It is quite striking to see a party, for which the immediate reaction to Obama's first term election was to make a hard right in order to oppose all items on the White House agenda, even if it had been on the GOP agenda in some form (cap and trade vis a vis global warming or healthcare reform), moderate even a little on core issues.  With the rise of the Tea Party in the mid-term elections, this apparent shift in the wake of Obama's re-election is not what I had expected.

For example, take Sean Hannity, Fox News arch-conservative pundit, who has done a virtual 180 on the issue of immigration.  Within two days of Obama's re-election, Hannity said "...if some people have criminal records you can send them home, but if people are here, law-abiding, participating for years, their kids are born here, you know, it’s first secure the border, pathway to citizenship, done, whatever little penalties you want to put in there, if you want, and it’s done."

Even Speaker of the House, John Boehner, who has lived in constant fear of the Tea Party wing over the last two years has taken a softer stance on immigration saying, "A comprehensive approach is long overdue, and I’m confident that the president, myself and others can find the common ground to take care of this issue once and for all."

Today, former Bush adviser Linda Hughes laid the smack down hard on old white guys pontificating on rape:
[I]f another Republican man says anything about rape other than it is a horrific, violent crime, I want to personally cut out his tongue. The college-age daughters of many of my friends voted for Obama because they were completely turned off by Neanderthal comments like the suggestion of ‘legitimate rape.’”
Sing it sister.

And yesterday, influential conservative pundit Bill Kristol went on "Fox News Sunday" and said something that is anathema to the Grover Norquist era-GOP: raise taxes on the rich.
It won’t kill the country if we raise taxes a little bit on millionaires … It really won’t, I don’t think. I don’t really understand why Republicans don’t take Obama’s offer
Really? The Republican Party is going to fall on its sword to defend a bunch of millionaires, half of whom voted Democratic and half of whom live in Hollywood and are hostile?
 We will see how this plays out when the new Congress convenes in January.  Will this break from party orthodoxy have a ripple effect on other pragmatic party leaders that are truly interested in solving the debt crisis, or will Grover Norquist and the Tea Party caucus assert its clout and kill a debt solution that includes tax increases to for the wealthy?

One of the provisions of the Bush tax cuts that will expire if Congress does nothing by the end of the year, is the capital gains tax rate of 15%.  If Congress extends the tax cuts, the long-term capital gains tax will increase to 20%.

One of the arguments for a lower long-term capital gains tax compared to regular income is that it discourages 'locking-in' gains.  That is, if you don't get any benefit from holding on to an asset for a while, you'll be more likely to sell it when it has appreciated in value to the point where the upside risk is lower than the downside risk (i.e. you believe it will fall in value before it rises value).  For example, if you buy one share of ABC stock at $10 and it runs up to $100 in the next three months, you will probably be inclined to sell and lock-in your $90 profit.  Yet, you will taxed at the short-term capital gains rate, which is whatever rate your normal income is taxed at.  So it may be more than twice the long-term rate.  In the example above, other investors are probably thinking of selling as well.  So if everyone starts selling to lock-in their gains, without the incentive of a lower tax rate for holding, there may be increased volatility in the market. (Of course, in this example, even with the lower tax rate, you may well be inclined to take the higher tax rate anyway.)

Assuming that reduction in volatility is a desirable outcome (and I think it generally is, although I can think of some counter-arguments), I agree with the principle of providing an incentive to hold assets for some pre-defined duration; one year seems reasonable.

Source: Congressional Research Service
But I think a better way to approach this would be to provide a dis-incentive to short term trading of assets that would be subject to capital gains tax.  Of course, the current structure was proposed and passed by the wealthy for the wealthy.  Why?  Because a) those in power are much wealthier than their constituents and b) wealthy people benefit most from favorable long-term capital gains treatment.  But why should the m(b)illionaire's source of income be taxed at a lower rate than the rest of us?

Another common trope to justify a lower long-term capital gains tax rate is that it leads to increased productivity, saving and investment.  This is the central tenant of supply-side economics, that when the rich do well, the mana trickles down to the rest of us in the form of higher employment.  Yet, the data does not support this hypothesis.  Instead, in a 2012 report, the non-partisan Congressional Research Service concluded that
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
Source: Congressional Research Service
So if lower taxes for the uber-wealthy doesn't have a measurable effect on economic output, and given the fiscal crisis facing the nation, the solution to maintaining the incentive to hold assets seems apparent.  Tax long-term capital gains at the same rate as normal income (which, btw, also needs to be reformed), and tax short-term capital gains at a higher rate to discourage speculative investments that lack a the fundamental financial merits to be held past one year.

But while that may discourage speculative investments by the wealthy, a flat, say, 50% for all income brackets would stunt the growth of those in the bottom brackets that may otherwise be on trajectory to enter higher brackets.  And yet, we want to maintain the dis-incentive to hold assets for the short term. Perhaps one way to deal with this is to peg the dis-incentive to the normal income rate.  That is, if your marginal tax rate is 20% and the dis-incentive is 50%, the tax rate on your short-term gains would be .2*1.5 = .3.  You would pay 30% on short-term gains.  Alternatively, if your marginal tax rate is 40%, a 50% increase would set your short-term tax rate at 60%.

I have little hope that my proposal or anything close to it would be adopted any time soon, but the shift in rhetoric and policy stance by conservative leaders gives me some hope that incremental progress is achievable.

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