Wednesday, November 6, 2013

The Era of Taxing Capital Less Should End

The Pacific Investment Management Company (commonly called PIMCO) is an investment firm headquartered in Newport Beach, California and is the second largest global fixed income investment manager in the world (Vanguard is the largest).

This week, Pimco’s co-founder Bill Gross wrote in his November investment outlook, “The era of taxing capital at lower rates than labor should now end.” --- meaning, taxing hourly wages or bi-monthly salaries for workers higher than the capital gains that the top 1% rakes in with unearned income through stocks and other means.

From the New York Times:

Mr. Gross, whose net worth is estimated at over $2 billion, wrote, “A fair economic system should always allow for an opportunity to succeed,” but pointed out that many of the superrich were fortunate to benefit from buoyant financial markets, low interest rates and a credit boom.

“You did not create that wave,” he said. “You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.”

He noted that two fellow billionaires, Warren Buffett and the hedge fund manager Stanley Druckenmiller, recently advocated a similar approach.

But the Republican's plan for any kind of tax reform is "broaden the base, lower the rates and simplify the code." --- meaning, make the bottom 47% pay more (by putting more skin in the game) and tax the top 1% less.

The top 400 income earners (the top 0.01%) with the highest adjusted gross incomes raked in (on average) $202 million each in 2009 (according to Internal Revenue Service data). And this doesn’t even count income that doesn’t show up as adjusted gross income, such as tax-exempt interest.

But they only paid an average federal income tax rate of less than 20 percent, far lower than the top marginal tax rate (which will be 36.9% this year).

They also paid a lower tax rate than those in top 1 percent, which were people with adjusted gross incomes of at least $344,000. These affluent, but hardly super-rich taxpayers, paid on average just over 24 percent of their adjusted gross income in federal income tax.

Six Reasons to Study Capital Taxation. The first four are from Emmanuel Saez:

  1. Capital income is about 25% of national income (labor income is 75%) but distribution of capital income is much more unequal than labor income. Capital income inequality is due to differences in savings behavior but also inheritances received> Equity suggests it should be taxed more than labor.
  2. Capital Accumulation is correlated strongly with growth (although causal link is not obvious) and capital accumulation might be sensitive to the net-of-tax return.> Efficiency cost of capital taxation might be high.
  3. Capital is more mobile internationally than labor. Incidence is then partly shifted to labor if capital is mobile.
  4. Capital taxation is extremely complex and provides many tax avoidance opportunities
  5. We also understand it less well than labor income taxation, so the topic deserves more focus and research.
  6. The future path of inequality will likely magnify the topic’s importance.

The richer you are, and the more you earn, the less you are taxed AS A PERCENTAGE of your income because of the capital gains tax loophole (tax on capital aka unearned income).

But Congress won't reform the tax code because THEY BENEFIT from the current tax code. Read, Taxes: How Congress Lets the Rich Pay Less

Based on a revised formula, the number of poor people in 2012 was 49.7 million, or 16 percent. That exceeds the record 46.5 million, or 15 percent, that was officially reported in September.

"This is a real incongruity, when 1 in 6 people face economic insecurity here in the richest country in the world," said Joseph Stiglitz, a Columbia University economist and former chairman of the White House Council of Economic Advisers who has argued for more government action to alleviate income inequality.

  • Food stamps helped lift about 5 million people above the poverty line. Without such aid, the overall poverty rate would increase from 16 percent to 17.6 percent.
  • If it weren't for Social Security payments, the poverty rate would rise to 24.5 percent for all age groups.

Who thinks these people should put more skin in the game?

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