Has America abandoned capitalism?

[swchandler]

capetonian, seemingly you don't consider capital gains to be income. As I mentioned earlier, Cain's position is that capital gains aren't taxed at all. Without a doubt, the very rich today often benefit greatly from capital gains income. Moreover, that would mean that someone who doesn't have any wage income from a job, but makes hundreds of thousands of dollars, or even millions, from capital gains income would not pay any income tax. Does that sound anywhere close to being fair to you?

[capetonian]

[swchandler]

There are many highly questionable paradigms out there that are no more than a litany of absurd Republican talking points.

- A progressively applied rate of taxation (higher for those at elevated income levels) is unfair.

- Low taxation means more jobs and investment.

- That higher capital gains tax rates (above 15%) negatively affect investment and innovation.

These are some of those promoted incessantly, almost like a mantra. The fact of the matter is that history has proven all of them to be false. I find it amazing that folks easily buy this propaganda with no real results.

No offense capetonian, I'm not trying to specifically pillar you here. It's just that I find it both tiring and frustrating to keep hearing this contrived stuff.

[keycocker]

The flat tax addresses the hassle of filing but not the key problem that we can't pay the bills.The total amount needs to be somewhat higher than now until spending cuts kick in and the monthly payment goes down.
That means some group pays more than now and Mr. Cain is not too eager to name them.
Reducing Gov, saves money mainly by reducing the number of jobs, like the 800,000 folks who prepare taxes or process them at the IRS.

[mac]

Capetonian--thanks for several thoughtful responses. We don't always get that from conservatives on this forum, or give it to them. I like you raising the idea of tax reform; it merits discussion and I certainly support it. But I don't know that we would agree on what tax reform should look like. I think the concept raises a number of issues, including equity, effectiveness, political feasibility, and whether or not it addresses the structural deficit problems that threaten our economy in the long term.

Much of the dialogue from the right conflates tax reform and tax simplification. They are two very different things. But they are frequently conflated because those at the higher tax rates are generally supportive of anything that would lower their tax rates. And both parties perpetuate the series of myths that we can have what we want without paying for it. The Democrats are wrong that we can fix everything by taxing the rich more--most of the benefits flow to the middle class. The rich are wrong that increasing the tax burden on them will stifle the economy, or is fundamentally unfair--they have benefited in a vastly increased share of wealth from the Bush-era tax cuts. We ignore the message of the Occupy movement at our own risk if we don't see a revulsion against that in the general public.

On equity, this country has long recognized that the wealthy have a much higher capacity to pay taxes after normal living expenses have been paid than the poor. We have had a progressive tax system that recognizes that for many decades, and an increase in tax rates of 3-4% at the highest margin is not socialism. On the other hand, you have raised a valid point that exempting a certain base income from taxation serves much the same purpose, and is simpler, and I support that general idea with some caveats. But it is a valid place to start the discussion.

There are both benefits and drawbacks to the current system of deductions, as well as practical political problems with trying to change them. The most common current exemption that benefits the middle class--but not the poor--is the homeowners exemption. I was able to shelter about 1/3 of my income from taxation for over 30 years, and was thus able to buy a house. It is now paid off, but I don't really think it is fair that I enjoyed a tax subsidy for home ownership, but my children and grandchildren might not. This exemption stimulated the construction industry, which has had enormous societal benefits, as well as the real estate bubble which destroyed $10 trillion in equity (although much of that equity was illusory.) I don't think it is politically feasible to eliminate that exemption completely, but I would support reform that limited the exemption to your first home, disallowed exemptions for any subsequent homes, and capped the deductions at some small multiple of the average home price in the country. This might prevent bard from buying a home in Malibu--icing on the cake.

I agree with the sense of some in the Tea Party movement that the pattern of exemptions in the tax code, and the size of the Federal government, perpetuate the worst practices in exemptions. We can only look at the Agricultural bill to prove the point. While the subsidies in Federal law established during the Depression served a valid public purpose then, they have been perpetuated, and have helped concentrate agriculture into larger holdings than simple efficiency would dictate because such concentrated power can "farm" the tax code with special interest bills. That pattern has been repeated across the economy, and both the Occupy and Tea Party movement are revolted by it.

But that doesn't necessary mean that all tax incentives should be removed, or can be with the current or any conceivable Congress. While a tax incentive is less efficient than the unconstrained market, we cannot argue that such measures are not effective. The question becomes what path to take to lower the risk of concentration of power and investment in activities like bubbles in housing and dot coms.

Capital gains provisions are an important case in point. I support a lower tax rate that supports a willingness to take a higher risk in investments that create American jobs. Lots of those businesses will fail, but the willingness to take a risk is part of the American ethos. To me, reform would distinguish between investments that create jobs in the United States, and those that primarily create jobs overseas. Reform would also distinguish between investments that create real things--factories, houses, crops, widgets--and those that gamble on the future. I see no reason to further stimulate housing bubbles by treating hedge funds as useful capital investments that should have a lower rate. Yet that is what much of the food fight in Washington D. C. over re-regulation of the financial sector was about, with the Republicans siding with the gamblers who actually don't create American jobs.

Finally, I wish that some politicians were adult enough to explain to the American public that we can't fix everything without both a reduction in the benefits to the middle class, and an increase in revenues. I think Obama understands this, but rarely says it. I think Mitch and Boehner are conspiring to hide it until they are back in office. Loathesome as I find him in many ways, I think Jerry Brown has filled that role in California with his recent proposal on public pensions. On the politics of reform, at least in California, I think it will take a politicians like Jerry, who understands labor but is not in thrall to them, to make the necessary and painful changes.

[swchandler]

Thanks mac for your thoughtful post. I have to say that I agree with much of what you're saying, particularly the last two paragraphs. The fact that gamblers on Wall Street are making huge sums of money betting against the market and getting to treat winnings as capital gains is inappropriate to say the least. With no growth, innovation and jobs resulting from this kind of gambling, it continues to amaze me how they are getting away it, garnering support and special treatment. If there is any practical benefit other than the enrichment of a very few players, I would like to hear it.

Regarding your last paragraph, you know that I've been consistent in the past about the need for everyone to step up to the plate when it comes to needed tax revenues. I don't think we have a chance in hell to cut our deficit and debt without it, to include some prudent reduction in government spending. However, when it comes to the latter, considerable care will be needed in making the right cuts, the ones that won't simply result in other serious and complex problems. While I haven't touched much in the past about the issue of government help for the poor and disadvantaged, I do share the concern that many on the right here have highlighted. Folks shouldn't necessarily be entitled to receive monetary and other costly benefits without doing anything to earn them, and importantly, government help can't be considered a perpetual crutch in the long term. Maybe it's requiring these folks to pick up trash on our streets, parks and freeways, or doing volunteer work in our schools and the surrounding community. Also, I believe that these folks need to educate and re-train themselves to become self sufficient, and ultimately be a productive member of their communities.

Lastly, you're absolutely right about Jerry Brown. In my view, he is showing that he has the balls to step up to the plate and address California's most serious problems. Its definitely taken a lot of nerve to come up against government unions on pension reform and offer practical ways to change things over time to lighten the load. Also, its interesting to note that he isn't resorting to a wholesale attack on collective bargaining like a number of governors have. You consider him to be loathsome, but I'm not sure why. But as time moves on, I'm convinced that he is arguably the best guy for getting things done in California.

[keycocker]

"I believe that these folks need to educate and re-train themselves to become self sufficient, and ultimately be a productive member of their communities. "

"everybody should have to pick up their welfare check on their way home from school "
Bill Cosby

This is a NeoConservative idea from the 70s when the movement was respectable and mainly concerned with an untenable welfare system.

[capetonian]

A lot of good responses to my post. Really busy today so don't have time for a full reply. Quick comment on long term capital gains tax. Assuming you have saved up capital over your lifetime and your son/nephew/son of best friend comes to you with a proposal to invest in his new business idea. Suppose his idea works (>50% of new businesses fail within 4 years of starting), and after 6 years you sell your investment for a 100% gain. That works out to a 12% annual return. At a 15% capital gains tax rate that return is reduced to 11%, 9% at 35% and 7% at 50%. Now lets say that instead of 6 years, you held the investment for 10 years before selling for a 100% gain. That works out to a 7% annual return before tax, 6% at 15% tax and only 4% annual return at a 50% tax rate.

Once you risk those returns for the average failure rate, under the current tax regime you are looking at a risked 5% return if you can realize it in 6 years, or 3% if it takes you 10 years. Suddenly doesn't sound like an exciting opportunity.

I can concede that activities that don't add to the productive capacity of America do not merit favorable tax treatment, but would prefer to envision a tax code that is sufficiently broad based, and a government spending structure that is appropriate to the countries needs that taxes are low enough that they are not the largest determining factor in an investment decision.

[capetonian]

[isobars]