The Wall Street Journal’s Primer on Capital Gains Taxation

One of the principles of good tax policy and fundamental tax reform is that there should be no double taxation of income that is saved and invested. Such a policy promotes current consumption at the expense of future consumption, which is simply an econo-geek way of saying that it penalizes capital formation.

This isn’t very prudent or wise since every economic theory agrees that capital formation is key to long-run growth and higher living standards. Even Marxist and socialist theory is based on this notion (they want government to be in charge of investing, so they want to do the right thing in a very wrong way – think Solyndra on steroids).

To help explain this issue, the Wall Street Journal today published a very good primer on taxing capital gains.

The editors begin with an uncontroversial proposition.

The current Democratic obsession with raising the capital gains tax comes from a mistaken belief that the preferential rate applied to the sale of a family business, farm or financial asset is a “loophole” that mainly benefits the rich.

They offer three reasons why this view is wrong, starting with a basic inequity in the tax code.

Far from being a loophole, the low tax rate applied to capital gains is beneficial and fair for several reasons. First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses.

Next, the editors highlight the unfairness of not letting investors take inflation into account when calculating capital gains. As explained in this video, this can lead to tax rates of more than 100 percent on real gains.

Second, capital gains aren’t adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. It’s therefore possible for investors to pay a tax on “gains” that are illusory, which is another reason for the lower tax rate.

This may not seem like an important issue today, but just wait ’til Bernanke gets to QE24 and assets are rising in value solely because of inflation.

The final – and strongest argument – is that any capital gains tax is illegitimate because it is double taxation. I think this flowchart is very helpful for those who want to understand the issue, but the WSJ’s explanation is very good as well.

Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. When you buy a stock, its valuation is the discounted present value of the earnings. The main reason to tax capital investment at low rates is to encourage saving and investment. If someone buys a car or a yacht or a vacation, they don’t pay extra federal income tax. But if they save those dollars and invest them in the family business or in stock, wham, they are smacked with another round of tax.

There’s also good research to back up this theory – some produced by prominent leftists.

Many economists believe that the economically optimal tax on capital gains is zero. Mr. Obama’s first chief economic adviser, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation “would have very substantial economic effects” and “might raise steady-state output by as much as 18 percent, and consumption by 16 percent.”

Summers is talking about more than just the capital gains tax, so his estimate is best viewed as the type of growth that might be possible with a flat tax that eliminated all double taxation.

Nobel laureate Robert Lucas also thinks that such a reform would have large beneficial effects.

Almost all economists agree—or at least used to agree—that keeping taxes low on investment is critical to economic growth, rising wages and job creation. A study by Nobel laureate Robert Lucas estimates that if the U.S. eliminated its capital gains and dividend taxes (which Mr. Obama also wants to increase), the capital stock of American plant and equipment would be twice as large. Over time this would grow the economy by trillions of dollars.

So why aren’t these reforms happening, either the medium-sized goal of getting rid of the capital gains tax, or the larger goal of junking the corrupt internal revenue code for a simple and fair flat tax?

A big obstacle is that too many politicians believe in class-warfare tax policy, even though lower-income people are among the biggest victims when the economy is weak.

For more information, here’s my video explaining that the right capital gains tax rate is zero.

P.S. Some of you may be wondering why I didn’t make a Laffer Curve argument for a lower capital gains tax. The main reason is because I have no interest in maximizing revenue for the government. I simply want good policy, which is why the rate should be zero.

P.P.S. I also didn’t bother to make a competitiveness argument, mostly because the WSJ’s editorial didn’t focus on that subtopic. But check out this post to see how Obama’s policy is putting America at a significant disadvantage.

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Have Fun with Both Anti-Obama Jokes and Anti-Romney Jokes

I can’t think of a better way to begin a weekend than by abusing the clowns who want to control our lives.

So, courtesy of News-max.com, here are some of the one-liners bashing the political elite from the late-night talk shows.

Jay Leno (the 5th joke reminds me of this amusing poster)

• It’s been a rough week for Mitt Romney. Former Minnesota Governor Tim Pawlenty has quit as co-chair of Mitt Romney’s presidential campaign. I think the technical term is “jumping ship.”
• I saw a guy today scraping a Romney bumper sticker off his car. It was Paul Ryan.
• Political pundits are taking Mitt Romney to task, saying his latest gaffe was not “presidential.” Vice presidential, sure. That’s Joe Biden territory.
• According to the Labor Department, unemployment fell from 8.3 percent to 8.1 percent last month. But that’s because 368,000 Americans gave up looking for work. Today, President Obama said that’s a step in the right direction, and he is encouraging more Americans to give up looking for work.
• Bill Clinton said that President Obama inherited a deeply damaged economy. And if he’s re-elected he’ll inherit an even more deeply damaged economy.
• President Obama’s re-election campaign said that this year they’ll knock on 150 percent more doors than they did in 2008. Well, of course they will. They have to. There’s so many foreclosures it’s tough to tell where people live.
• I’m very excited; we have Ron Paul on the show tonight. Unlike the Republicans, we’re actually going to let him speak.
• A man in Florida has been arrested for wearing a President Obama mask while robbing a McDonald’s. To show you how good this guy’s disguise was, instead of a holdup note he was reading from a teleprompter.
• This Obama robber made some pretty scary threats to the McDonald’s employees. He said, “Give me your money, or else my economic plan will have you working here for the rest of your life.”
• According to The New York Times, more than half of President Obama’s Twitter followers are fake. They don’t even exist. Which is actually a good thing because if they did exist there wouldn’t be any jobs for them.
• President Obama is seeking to make his case with first-time voters. Well, you can understand why. Second-time voters have graduated and can’t find a job.
• It looks like Hurricane Isaac has delayed the Republican convention for one day. This is a big storm. In fact, Isaac has scared more senior citizens than Paul Ryan.
• Some of the Republicans, I think, are over-reacting to Hurricane Isaac — like today Rick Santorum was seen gathering up two of every animal.
• Herman Cain was in Tampa. When a reporter asked him if Isaac reminded him of Katrina, he said, “I never even met the woman.”

David Letterman

• Leaves are falling, temperatures are falling, Romney’s poll numbers are dropping. It must be autumn.
• Happy birthday to New Jersey Gov. Chris Christie, who is 50 years old. They had a cake for him. He blew out the candles and then he wished for another cake.
• Are you excited about Labor Day weekend? That’s a holiday where Americans take three days off from looking for a job.

Conan

• A lot of people are commenting that Mitt Romney is looking extremely tan lately. In fact, if Romney gets any darker he’s not going to vote for himself.
• Mitt Romney is trailing in the polls. After being accused of being too vague, Romney’s campaign team says they will start being more specific. When asked when, they said, “Soon-ish.”
• New polling shows President Obama has a 10-point lead in Mitt Romney’s home state of Michigan. Although in Obama’s home state of Hawaii, Romney has a 10-house lead.
• Early this morning in Los Angeles police were involved with a high-speed chase with a suspect drawing a crowd by throwing money out the window. Is it me or is Mitt Romney getting desperate?
• In Yemen, a U.S. drone strike has killed al-Qaida’s number two leader, the sixth second in command the U.S. has killed. This is one area where Obama can say he definitely is creating jobs.
• Over the weekend Mitt Romney made an appearance at a NASCAR race in Virginia. There was an awkward moment when he asked a NASCAR driver why he didn’t just hire a chauffeur.
• Mitt Romney released another ad that features Hispanic voters speaking in Spanish. The ad ends with him saying, “I’m Mitt Romney, and I have no idea what these people are saying.”
• Today Scarlett Johansson, Kerry Washington, and Eva Longoria all spoke at the Democratic convention. This means that Obama has all but clinched the crucial 13-year-old boy vote.
• If you’re a donor to President Obama’s campaign, you were promised exclusive access to Joe Biden — and for an extra $10,000 absolutely no access to Joe Biden.
• A group of coal miners in Ohio said that their bosses forced them to attend a Mitt Romney campaign event. You know you’re boring when people would rather dig coal than listen to you speak.

Jimmy Kimmel

• Mitt Romney was on “Live With Kelly and Michael.” At one point Mitt was asked what he wears to bed. He said as little as possible. It’s the same philosophy that Mitt has in regard to paying taxes.

Jimmy Fallon (his next-to-last joke reminds me of this classic from Craig Ferguson)

• On Saturday, Mitt Romney took some time off from campaigning to watch his grandson’s soccer game. Though it got awkward when one team pulled their goalie and Romney was like, “Look at that — another job lost under President Obama.”
• Yesterday in Nevada, President Obama said he’ll win the election if the turnout is anything like it was in 2008. While voters said he’d win if he were anything like he was in 2008.
• Actually, members of Mitt Romney’s own party are starting to criticize him for being too vague. When asked if that bothers him, Romney said, “Maybe.”
• A new CNN poll shows that President Obama now has a six-point lead over Mitt Romney. You can tell Romney’s depressed — last night he just sat on his couch and bought the Häagen-Dazs corporation.
• Yesterday, Paul Ryan said that he and Mitt Romney won’t reveal their tax plan to the public until after the election. Other politicians couldn’t believe it. They were like, “At least do the honorable thing and lie.”
• A new poll shows that President Obama has expanded his lead over Mitt Romney since the Democratic National Convention. Of course, it didn’t help Obama as much as that other event — the Republican National Convention.
• There are reports that nine of the hotels being used for politicians at the Democratic National Convention have bedbugs. When asked what it’s like to have to deal with thousands of ruthless bloodsuckers, the bedbugs were like, “Eh, it’s OK.”
• Over the weekend, a chef in Minnesota created the world’s largest bacon cheeseburger, weighing in at over 2,000 pounds. And if you want to hear what it tasted like, you’ll just have to wait until I interview Chris Christie.

Craig Ferguson

• Over the weekend, Vice President Joe Biden hung out with a biker gang in Ohio. I don’t know if that’s wise. It’s not always a good idea to be associating with shady characters. So next time, think twice, bikers.
• Former Democratic nominee John Kerry is going to give a speech about foreign policy. It will be like Clint Eastwood’s speech except this time the empty chairs will be in the audience.
• At the convention tonight, the surprise speaker was Clint Eastwood. What’s more surprising than a grumpy old white guy at the Republican convention?
• I can’t wait to see the debate between Ryan and Joe Biden. Biden is said to be already trying out different strategies. So far the one that Obama likes is where Biden pretends to have food poisoning and they cancel the debate.

As always, here are previous editions of the jokes from the late-night talk show hosts: here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.

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