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Fairness and the Capital Tax Fetish
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Issue
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| Contributor | excelsior |
| Last Edited | excelsior Aug 09, 2010 12:34pm |
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| Category | Opinion |
| Author | Glenn Hubbard |
| Media | Newspaper - Wall Street Journal |
| News Date | Monday, August 9, 2010 06:30:00 PM UTC0:0 |
| Description | The relationship between investment, capital and wages is such that workers are better off if capital is not taxed at all.
Think of the economy as a pie split among workers, savers and the government, with the government's slice fixed. The savers' slice will equal the after-tax return on each unit of the capital stock, and what's left goes to workers as after-tax wages. The fairness advocates in effect claim that low tax rates on dividends and capital gains increase the share of the pie that goes to high-income savers. But the low tax rates increase the absolute size of the workers' slice by making the entire pie bigger. That's because low tax rates encourage capital accumulation, productivity and wage growth . . . .
One can, of course, make the argument that we should put the whole tax system on the table to debate fundamental tax reform. I am all for that. But I know of no proposals by economists for fundamental income or consumption tax reform that do not include low or zero tax rates on dividends and capital gains. Indeed, "tax reform" centers on permanently lowering marginal tax rates while broadening the tax base to secure adequate revenues. Any reform plan that does not maintain or reduce marginal tax rates—permanently—is moving in the wrong direction.
If the Obama administration's goal were truly fairness, it could propose an increase in the average tax rate on higher-income earners without raising marginal rates—for example, by limiting deductions. Does the Treasury really believe that raising dividend and capital gains taxes addresses its fairness concerns at the lowest cost in terms of reduced economic activity?
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