AEI Tries (and Fails) To Explain Why Capital Gains Taxes Shouldn’t Exist

When confronted with arguments you don’t like you have two options: (1) go defensive to challenge or downplay it; or (2) go on offense and claim the opposite is true. Obviously the latter is more aggressive, and if you’re good at it you can change the narrative and turn a negative into a positive. Unfortunately, trying to be so counter-intuitive usually comes off as desperate and stupid. AEI opts for the second approach.

AEI saw Mitt Romney floundering over his inability to justify how, as a multi-millionaire, he pays an actual tax rate of around 15% (before accounting for other income or tax loopholes he may use), and decided to argue that Romney’s tax rate is actually too high. Bravo boys and girls.

First, AEI argues that 15% is “still higher than the 8.2 percent average effective income tax rate (as of 2010) of U.S. households (once you factor in various tax credits).” This comparison is a poor attempt at sleight of hand. The fact that those in poverty pay a smaller portion of their income (or none) in taxes, driving down the overall average is not a warrant for letting a multi-millionaire skimp on his taxes while a great many of us pay much more. Functionally, the argument is that someone in the 1% (if not .01%) top of the income ladder should get a pat on the back for paying close to the rate of someone around the 50th percentile — ignoring that many others are paying much more while earning much less. REMINDER: This is the argument they decided to lead with. Uh oh.

Second, AEI argues that the capital gains tax is a double tax, which is a popular trope among conservatives. The argument is that it is unfair that a corporation pays corporate taxes before distributing assets to its shareholders, who, they argue, are actually the corporation and deserve to be taxed only once on that money. This is extra laughable because the argument is made by the same people who insist that corporations are people separate and apart from their shareholder owners. There is no double taxation, the corporation is paying for the advantages it receives as a legal entity (including, wrongly, personhood) and then paying back what it makes to its investors.

Third, AEI contends that the capital gains tax, even at 15%, dissuades investment and we need more investment in this country. This is AEI’s best argument and it’s presented third for good reason because it is irrelevant to Romney’s situation. For a multi-millionaire, there is very little to do with your money besides invest it. While providing an incentive for investment by keeping capital gains taxes low may convince a middle class family to buy a mutual fund rather than a new TV, it will have very little impact on what Mitt Romney does with any given dollar. Rather than give a free pass to those whose massive wealth allows them to take advantage of passive income at tax rates below those of many Americans, the valid concern AEI raises can be addressed with a higher capital gains tax rate and exemptions for capital gains below a certain threshold (especially for home sales) to encourage lower and median income households to invest, while still holding the Romneys and Buffetts of the world to tax rates on par with other Americans in their income bracket.

Fourth, AEI seems to think that a capital gains tax is theological and only meant to punish the rich. This is a cheap rhetorical move — pretending to be fair by presenting the counter-argument, but instead presenting something ridiculous. Essentially, “the only reason to tax capital gains is because people feel like it.” In fact, the justification for taxing capital gains is only partially to prevent the absurdity of the wealthiest Americans paying a smaller share of income to the national mission from defense to deficit reduction than those who earn less. The argument to increase taxes on capital gains also recognizes that a large portion of capital gains every year are in the form of land transactions, which do not actually encourage any growth.  It also encourages withdrawal from entrepreneurship and simply collect passive income because it offers tax advantages over actually working.

And then AEI quotes JFK (see what they did there? “Kennedy agrees with me!”) peaking out against the capital gains tax without mentioning that the capital gains tax was confusing and involved tax exempt amounts and an alternative minimum of 25% if your ordinary tax rate exceeded 50%. That mess would give any investor pause. Like most conservative tax arguments, perspective is important. Increasing capital gains taxes on all Americans to, say, 90% would chill domestic investment, but that’s not what we’re talking about and pretending that this is the same as increasing the tax to 20% or 25% for those few individuals who use passive investments to avoid the taxes they’d face in income taxes is foolish.

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