I’m saddened, but not surprised, about the predictable outcry over the Biden administration’s proposals to double the capital gains tax rate so that it roughly matches the top-earned income tax rate that many of us making our money from work, not investments, have to pay. The thing that makes me sickest about this whole thing is the idea that this is somehow penalising “entrepreneurs” or hurting middle-class Americans and stalling job creation.
A few years ago, I wrote an entire book about how the financial system had stopped serving business and started serving itself. At the time the book came out, in 2016, statistics showed that only about 15 per cent of the money sloshing around the financial system was being put into new business investment; the rest of it existed in a closed loop of the buying and selling of existing assets (stocks, bonds, mortgages, etc).
Through this process of financialisation, the financial markets have grown to more than triple the size of the real economy. What’s more, there is a large body of global research to show that when financial markets grow to this size, they actually become a headwind to economic growth. The tail wags the dog. And you get slower growth, and less job creation. (If you want all the footnotes and specific research studies backing this up, which are myriad, check out the first two chapters of my book, Makers and Takers.)
What you do get, though, is higher asset prices. That’s what has happened since financialisation took off over the past four decades. Tax rates have fallen. Asset wealth has grown. But real trend growth of gross domestic product has slowed, and each recovery since the 1990s has taken longer and been less robust than the one before. Does anyone really think that trickle-down theory works any more? There simply isn’t any reason to tax capital gains at a lower rate when 85 per cent of money sloshing through the financial system isn’t going into real main street investments, but rather into the pockets of the moneyed classes.
Members of that class with morals and a sense of fairness — such as Warren Buffett — have been saying just this for ages. Remember several years back when he pointed out that he paid a lower tax rate than his secretary as part of a campaign to shift to higher taxes on speculative, short-term capital gains in particular? I interviewed him around that time and one of the points that he made (aside from noting that trend growth rates in the US were higher when tax rates, too, were higher) was how we needed to get serious about shared sacrifice. As he put it then in 2012, “Capitalism has unleashed more human potential than any other system in history.” But, he says, “we need a tax system that essentially takes very good care of the people who just really aren’t as well adapted to the market system but are nevertheless doing useful things in society”.
Bond traders, technology titans and corporate raiders of the world, take note: your higher taxes should subsidise bridge builders and childcare workers.
Ed, I’m curious if you think there’s actually anything in this capital gains tax proposal that we should worry about. Readers, feel free to send in your own serious thoughts on the same.
Rana, I don’t think there are any economic alarm bells in Biden’s forthcoming personal tax proposal (this week, I believe). Trump’s tax cut had no discernible effect on business investment, or the level of entrepreneurship. Reversing it is unlikely to have an impact either. The politics of Biden’s bill may be another matter. As you say, what its critics will highlight is the rise in the top rate of capital gains tax, which is set to exceed 40 per cent for those earning more than $1m a year. That is a big jump and will test the loyalty of Biden’s wealthier liberal base.
I wrote about their agitation to lift the cap on Salt payments a couple of weeks ago. The capital gains increase will only add to that. My question is whether this group’s liberalism amounts to anything more than a bunch of vague commitments to diversity. Trump was good for their bottom line. Biden won’t be. To what degree are the wealthy prepared to sacrifice in a larger cause? We will find out. But it is important to remember that Biden’s proposal will be just that. After the likes of senators Joe Manchin and Kyrsten Sinema and other moderates have had their say, the top rate will probably fall. The same applies to the corporate tax rate. I expect that to land at 25 per cent rather than Biden’s preferred 28 per cent.
What I would most like to see is a gas or mileage tax with some kind of relief for those below median income. If Biden is serious about his very ambitious carbon emissions goal (reducing America's output by almost half by 2030), he will need to use the pricing signal quite ruthlessly. There are ways to tax carbon non-regressively, which is important (see Macron’s trouble with the yellow vests). Without a carbon tax I don’t see much prospect of America meeting Biden's ambitious new targets.
And now a word from our Swampians . . .
In response to: ‘America’s limbo between pandemic and freedom’:
“As a parent at Grace Church School I am shocked that you would suggest to your readers the unfiltered consumption of Mr Rossi’s letter. This piece of writing omits central facts of what is happening at our school in regards to the teaching of racial literacy. One can disagree on certain methods and there is room for reasonable criticism on the specifics of how this matter is being handled at Grace and other schools. But the fact that this country is suffering from systemic racism and that we have to teach our children how to improve this situation is not negotiable.” — Lars Jensen