"Laffer-able"

Since the recession is caused by rich people deciding not to work, the solution, of course, is to cut capital gains taxes to they'll stop lounging around and do something productive:

Laffer-able, Marion Maneker, BP Cafe: ...Art Laffer ... was on Fast Money... The segment was on the proposed Obama tax cuts. Laffer didn’t think much of them. Instead, he wondered aloud, what if the government proposed a 6-month income tax moratorium: how great a stimulus would that be? After all, Laffer reasoned, freeing citizens from the undue burden of taxes would get them all out working harder and spending money.

Really? Did anyone on the panel believe that Americans of all income levels are sitting on the couch–or lounging out by the pool–instead of working because they’re unhappy with their income tax? They’re knocking off early because the marginal rates are too high and they’d prefer the leisure time to the minimal extra money? Fascinating. Unemployment moving toward double digits and the greatest white-collar restructuring in 15 years all because of onerous income taxes?

Sure, he’s a guest on the show–they’re being polite, right?–but not one of the traders said a word about this preposterous idea. They just nodded their heads in agreement and kept the bobbing up as Laffer launched into his idea that capital gains should not be taxed at all.

The slam against the Obama cuts was that the money would go into the mattress, not stimulate the economy. ... But why would the wealthy be any different? Cut their income tax or capital gains and they’ll put the money in the mattress right now too.

Not that cutting the capital gains tax would do anything to move money off the sidelines. Where would it go? What productive use would it be put to?

I’d share the segment with you but there’s no clip of his appearance on the CNBC site and the short post on the segment on Fast Money’s page is covered by an intrusive pop up. Maybe they’ve finally gotten a sense of shame for promoting this voodoo.

This tries to use a stabilization argument to implement a growth policy, which is a bad idea. We can debate whether cutting capital gains taxes is a good way to promote economic growth in the long-run, but it's clear that cutting the capital gains tax is a lousy short-run stimulus program. Even if it does promote new investment, and again that is a point that can be debated even in good times, in bad times it's hard to imagine a cut in capital gains motivating new investment when the economic outlook is so poor and so uncertain. In addition, you run into the same "are the projects shovel ready" problem you run into with public spending. For the most part, they aren't shovel ready and planning and constructing new investments, e.g. building a new production line, is not something that happens overnight. But no matter, the real goal here isn't stabilization anyway, and the long-run growth arguments are mostly a vehicle for obtaining the real goal: tax cuts for the wealthy. I hope Democrats don't give into this nonsense as they continue to compromise to get something passed.

Update: In comments to another post, where I agree that some type of tax cut may be needed as part of the stimulus package, and also say that "I am not thinking of the trickle down variety,"pgl says:

Tax cuts for the well to do - who are not borrowing constrained - will likely have NO aggregate demand stimulus effect as I have often argued (aka either Life Cycle or Ricardian Equivalence) models so if this is what the Republican Party have in mind - it is based on hogwash economics.  Tax cuts for the working poor, however, may be a good idea as these households will consume much of the tax cut.  I think this is what Obama has in mind.  If your argument is that we should go with the kind of tax cuts Obama campaigned on - I agree.  But tax cuts for Bill Gates is just stupid from a Keynesian point of view.

Update: And speaking of tax cuts of questionable value as a stimulus measure, Dean Baker:

More Money for Robert Rubin, Beat the Press: It looks like President-elect Obama is picking up President Clinton's promise to end welfare as we know it. Back in those pre-welfare reform days, welfare checks went to poor families. Welfare as we know it now seems to involve giving taxpayer dollars to Citigroup and other banks.

The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to the Washington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years, as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007.

Did the political connections of Robert Rubin and others in the financial industry have anything to do with the decision of Obama's economic team to be so generous to them? I don't have an answer to that question, but the media should be asking it.

At best, I suppose you could argue this is a backdoor method of recapitalizing struggling financial institutions, but even then there are better ways to provide for recapitalization.

Comments

[mmckinl]

" In addition, you run into the same "are the projects shovel ready" problem you run into with public spending. For the most part, they aren't shovel ready and planning and constructing new investments, e.g. building a new production line, is not something that happens overnight."

~~~~

Medicare for All ~ Shovel Ready !

Within weeks of enactment Federal dollars can be underwriting states by taking over Medicaide from the states, the states sign anybody without insurnace up irregardless of income. The under and uninsured get Medicare. Follow this with public employees and then private health care plans.

Medicare for All ~ Shovel Ready !

[Elliot]

On November 3rd, Laffer had a ridiculous appearance on Fast Money in which the panel asked no provocative questions. Laffer's sole point on that day was to push forward his Laffer Curve theory, yet when asked at what point an income tax would yield higher government revenues, his response was simply "lower than here." The panel accepted this response without a followup and all on the show proceeded to ponder the benefits of a flat tax system. I nearly spit up my day's eating for subjecting myself to watching that bull. How so many people accept the Laffer Curve as theory is beyond me. The man himself cannot even justify/explain his thoughts with words.

We need the right people to go on these shows and push the Keynesian side. There is too much great evidence supporting Keynesianism, yet not enough public support.

[Patricia ShannonP]

So when are we part-time middle-class, part-time poor workers going to get back income averaging, which Reagan did away with?

[kthomas]

I think Laffer is Dr Thoma's FAVORITE useful idiot.

@Elliot - I agree. Most of us do.

[robertdfeinman]

I'm pretty sure that the majority of capital gains are from non-primary investments. By this I mean that someone buys stock in an existing firm and later sells it to someone else.

At no point in this transaction did the underlying firm benefit, so the lower tax rate did nothing to stimulate entrepreneurship or investments in new plants and job creation.

Perhaps one could devise a system where the original providers of capital (say from an IPO) get special tax treatment, but everything else is just giving a break to gamblers.

I'm sure those who play the horses would like such a deal too.

[lee]

Bill Gates doen't worry about capital gains. He just puts it in his foundation(controlled by his wife)avoiding the 15% which then pays out 5%(minimum required by law) and let's him be perceived as a Philantropist.

[mmckinl]

robertdfeinman says...
I'm pretty sure that the majority of capital gains are from non-primary investments. By this I mean that someone buys stock in an existing firm and later sells it to someone else.

At no point in this transaction did the underlying firm benefit, so the lower tax rate did nothing to stimulate entrepreneurship or investments in new plants and job creation.

~~~~

Excellent point ... Exactly why all income should default to ordinary income unless as you say real original productive investment occured. Same holds true for real estate and all the preferred tax treatments there.

[anne]

http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/

January 6, 2009

Stimulus Arithmetic (Wonkish But Important)
By Paul Krugman

Bit by bit we're getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we're probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus.

In the extended entry, a look at my calculations.

The starting point for this discussion is Okun's Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun's Law coefficient *range from 2 to 3. I'll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.

Now, what we're hearing about the Obama plan is that it calls for $775 billion over two years, with $300 billion in tax cuts and the rest in spending. Call that $150 billion per year in tax cuts, $240 billion each year in spending.

How much do tax cuts and spending raise GDP? The widely cited estimates ** of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective.

In particular, letting businesses get refunds on past taxes based on current losses, which is reportedly a key feature of the plan, ** looks an awful lot like a lump-sum transfer with no incentive effects.

Let's be generous and assume that the overall multiplier on tax cuts is 1. Then the per-year effect of the plan on GDP is 150 x 1 + 240 x 1.5 = $510 billion. Since it takes $300 billion to reduce the unemployment rate by 1 percentage point, this is shaving 1.7 points off what unemployment would otherwise have been.

Finally, compare this with the economic outlook. "Full employment" clearly means an unemployment rate near 5 — the CBO says 5.2 for the NAIRU, *** which seems high to me. Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we're looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan's perceived failure, if it's spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."

Let's hope I've got this wrong.

* Multiplier - http://blogs.wsj.com/economics/2007/07/19/more-on-okuns-law/

** http://www.economy.com/mark-zandi/documents/Small%20Business_7_24_08.pdf

*** Non-Accelerating Inflation Rate of Unemployment

[jack g]

I can't believe that anyone still listens to Mr. Laffer. He's an engaging speaker and certainly has convictions but he's consistently proved wrong.

[anne]

"The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal."

The proposal is actually an extension of a Treasury-Internal Revenue Service ruling that made Wells Fargo so aggressive in taking over Wachovia before Citigroup evidently understood the value of the tax savings and bid up the price for Wachovia. Citigroup simply missed the importance of the ruling.

[gordon]

I'm still wondering why the EPI's Plan to Revive the American Economy gets so little discussion. It's been around for months, but I'm not aware of any serious discussion, not even a barrage of criticism. I wonder why.

[anne]

The New York Times wrote of the Treasury-IRS ruling on bank debt deductions expressly to facilitate mergers and it was being openly discussed among analysts for weeks as legislative addition to the stimulus package. There is Republican and Democratic support, but we should remember Obama has promised no frills so obviously this is no frill.

[Björn]

What counts is not to get already rich to do productive work.

What counts is to encourage those not already rich to do productive work. The latter holds because they presumably adds something even more beneficial to society than the previous ones.

Yes there are aristocrats, but that is a cost I am willing to bear in order to live in a prosperous world.

[ken melvin]

Calling it the 'Laffer Curve' was pure genius. The actual curve clearly shows the rich working harder when they are subject to higher tax rates kinda like the illegal lawn services who lower their prices then work more hours.

[save_the_rustbelt]

Laffer is a goofball.

Dean Baker, usually credible, seems to be confusing tax credits with tax loss carrybacks. Sloppy.

"There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against."

Dr. Baker offers this gem without even a hint of anecdotal evidence. Since 2008 returns have not been filed, he must have ESP.

[ken melvin]

The problem is: What to call it since Laffer is already taken.

[Mcwop]

robertdfeinman, you are right that buying and selling stocks is not direct investment, or "new" capital raised. BUT, it is an important part of the process in raising new capital for direct investment. Many companies issue new stock, and the current pricing feedback from regular trading of already issued shares, is important in that process. Notice, in a strong stock market there are many more IPOs than a weak market. By penalizing one, you penalize the other.

[GloomBoom]

Laffer is laffable! However, he is laffing all the way to the bank because he is welcomed back to all these shows and treated like he is knowledgeable. It undoubtedly sells a lot of books.

[don]

Elliot says "We need the right people to go on these shows and push the Keynesian side. There is too much great evidence supporting Keynesianism, yet not enough public support."
The political support for the phase-out of the estate tax caused me to give up on the idea that the American electorate can be educated on economic principles. It appears that it is too much to ask of it even just to recognize its own best interests. Iraq, 'swift boats' and stem cell research caused me to cast a jaundiced eye on the notion that it could be educated on anything else as well. The only way it seems to learn is through experience. Even then, as often as not, it is apt to take away the wrong lesson.

[stunney]

Mcwop :robertdfeinman, you are right that buying and selling stocks is not direct investment, or "new" capital raised. BUT, it is an important part of the process in raising new capital for direct investment. Many companies issue new stock, and the current pricing feedback from regular trading of already issued shares, is important in that process. Notice, in a strong stock market there are many more IPOs than a weak market. By penalizing one, you penalize the other.

I don't see what difference altering the capital gains tax rate makes to this process.

Is there any empirical data on stock market trading volume being affected by alterations of the CGT rate? And if the data do show that lowering the rate increases trading volume ceteris paribus, is there any empirical evidence showing that a higher volume of trading increases original investment activity as against increasing short-term speculative activity which in turn leads to bubbles and other volatile trading behavior, resulting in widespread asset mis-pricing, resulting in mis-allocation and destruction of financial capital, and distorting the behavior of corporate management in ways that hurt the long-term economic welfare?

I'll take my answer off the air.

[rufus]

mmckinl says...
"irregardless of income"

Absolutely no problem with the gist of your post, in fact I like it. However a 2 point deduction for grammar correction, 'regardless' or 'irrespective' as the other is not a word.

[anne]

http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/

January 6, 2009

Stimulus Arithmetic (Wonkish But Important)
By Paul Krugman

Bit by bit we're getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we're probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus.

In the extended entry, a look at my calculations.

The starting point for this discussion is Okun's Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun's Law coefficient *range from 2 to 3. I'll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.

Now, what we're hearing about the Obama plan is that it calls for $775 billion over two years, with $300 billion in tax cuts and the rest in spending. Call that $150 billion per year in tax cuts, $240 billion each year in spending.

How much do tax cuts and spending raise GDP? The widely cited estimates ** of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective.

In particular, letting businesses get refunds on past taxes based on current losses, which is reportedly a key feature of the plan, *** looks an awful lot like a lump-sum transfer with no incentive effects.

Let's be generous and assume that the overall multiplier on tax cuts is 1. Then the per-year effect of the plan on GDP is 150 x 1 + 240 x 1.5 = $510 billion. Since it takes $300 billion to reduce the unemployment rate by 1 percentage point, this is shaving 1.7 points off what unemployment would otherwise have been.

Finally, compare this with the economic outlook. "Full employment" clearly means an unemployment rate near 5 — the CBO says 5.2 for the NAIRU, **** which seems high to me. Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we're looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan's perceived failure, if it's spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."

Let's hope I've got this wrong.

* Multiplier - http://blogs.wsj.com/economics/2007/07/19/more-on-okuns-law/

** http://www.economy.com/mark-zandi/documents/Small%20Business_7_24_08.pdf

*** http://www.google.com/hostednews/ap/article/ALeqM5j6z3BcdWqtB2Un5otM0G5JpRoH_QD95HKNU80

**** Non-Accelerating Inflation Rate of Unemployment

[Mcwop]

Stunney here is some info:

http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VBX-3X2J0CK-3&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=ba792a4c420f2c2f2b4e16512c62cba6

http://nber15.nber.org/reporter/fall04/shackelford.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=890743

http://www.nber.org/s/search?q=capital+gains+taxes&client=test3_fe&proxystylesheet=test3_fe&site=default_collection&btnG=Search&entqr=0&ud=1&output=xml_no_dtd&oe=UTF-8&ie=UTF-8

I apologize if by off air you meant for me to email you, but I did not see an email address.

[Mcwop]

Stunney, I forgot to add that many stock transactions are not subject to taxes such as Pensions and other retirement oriented accounts. Also, short term gains are taxed at the investors ordinary income tax rate, and do not qualify for the lower rates.

[robertdfeinman]

The issue was whether preferential capital gains treatment would lead to increased economic activity. Trading existing shares is not the kind of economic activity most people are referring to.

Pricing of new shares has nothing to do with how subsequent trades are taxed. The most one could say is that shares might generally trade lower compared to some other type of instrument if they did not have such favorable tax treatment.

The solution is to eliminate all distortions of taxation. Let regular income, dividends and capital gains all be subject to the same personal tax rates and this factor will be eliminated from people's decisions. Then the various types of investment decisions will be based upon other factors such as risk or expected return.

Perhaps if people were subjected to a 95% tax rate they would stop working for awhile, but how many people would fall into this category? The UK had a period where superstars were working elsewhere to avoid such taxes, but it was more noise than real effect on general behavior.

Laffer's premises have been so discredited so many times that one wonders why they are even discussed any more. I supposed one could ask why people discuss the weather.

The fix for income loss during a downturn is to provide income replacement. The solution (if desired) for excess manufacturing capacity is to encourage consumption. One helps people, one helps firms.

Most people in power these days focus on the firms and have lost sight of the people. Even the Dems don't seem to understand the difference. As I repeatedly ask, can we devise a new type of society which provides for people's needs but doesn't rely on the unsustainable consumption of limited and irreplaceable resources?

Apparently the question is too hard for economists and politicians to even consider.

[Mcwop]

Well Robert I agree with parts of what you say, and if we want to get rid of distortions then that must include municipal bonds, which is what rich people use more than anything to avoid taxes.

I just want a capital gains tax rate to not penalize "non-rich" savers. Someone earning 100K, and diligently saving some money, but then paying the top marginal rate on rather meager savings strikes me as non-productive. I could care less about Bill Gates, but I do care about regular folks trying to save and get ahead. Too much emphasis is on consumption, and not savings. There is a balance.

[cm]

Mcwop: While capital gains tax rates probably play a role in IPOs, I'd suggest IPOs e.g. during dotcom in the US were probably more fueled by a lot of credit bubble money sloshing around.

[Jim]

Perhaps we should save more and buy only what we need. That of course would cut the economy to 2/3 or less of what it is and eliminate all non-essential enterprises. Since profits are the last 15% of income at best, this of course will trash the economy for a good long time while we eliminate the non-essential portions of the economy.

Have I mentioned that a fast food meal costs too much by at least a third?

[Gene O'Grady]

I question the common assertion about how few "shovel ready" projects there are, and some of the assumptions behind it. From previous work experience in facilities at a major public/private institution that will remain nameless I'm pretty sure that there is deferred maintenance and small to medium (defined as $1-1.5 million) upgrades at every university and medical center or hospital in this country that could use up pretty much the whole stimulus. Not to mention that there is an incredible amount of underground pipe laid in the urbanization of 1880-1920 that has an approximate hundred year lifespan.

While I won't go into the gender assumptions behind "shovel-ready," I also note that cutbacks on receptionists, support staff, etc. have gotten most of us non-rich Americans used to a pretty lousy level of service. (For what it's worth, this is what I have done for a fairly large portion of my bizarrely diverse work life.) Surely letting people talk to a real person who has the time to help them (starting almost certainly with the VA) might be an idea whose time can come again.

[TigPil]

"The solution is to eliminate all distortions of taxation. Let regular income, dividends and capital gains all be subject to the same personal tax rates and this factor will be eliminated from people's decisions."

One reason to have a distinct long term capital gain rate is to counteract the effect of inflation. With regular income, dividends or interest payments the income is delivered in the same year as it is accrued so inflation has a minimal impact. With a capital asset held over multiple years, a nominal capital gain might actually be no gain at all in real terms. Taxing a multi-year nominal gain as ordinary income would create a substantial disincentive for holding assets whose primary return is via capital appreciation.

Historically, the most commonly held capital asset and effectively a savings vehicle has been people's homes. This was generally subject to capital gains taxes until the exemption introduced in 1997. Since the long term average appreciation in real estate values was just .4% above inflation, taxing capital gains on such transactions at ordinary rates would make housing one of the worst investment classes in real terms. In fact in periods of high inflation applying a tax to a nominal gain would result in a negative real return for the transaction.

If one really were to eliminate all distortions, the proper way to tax capital gains would be at the same rates as ordinary income but only on the real rather than the nominal gain. The current system undertaxes transactions that span only a couple of years and in periods of low inflation and overtaxes assets that are held for a decade or more and in periods of high inflation. Of course implementing such an inflation adjustment based on the specific years an asset was held would only further complicate the burden of tax filing.

[dood]

YOU IGNORANT FOOLS!!!

Capital Gains taxes = great depression

YOU FOOLS!!!

[bakho]

Useful idiots are often well compensated for their services.

dood- lay off the kool-aid.

[robertdfeinman]

I doubt there is much holding of stocks over the long term any more, so the inflation argument is not really relevant.

I've got a few stocks that I've owned for over a decade, but I'm sure this is rare. Most people have their long term funds invested in stocks indirectly in mutual funds or retirement accounts.

My stock-based pension fund has an annual turnover of over 100% which means that on average they hold stocks around six months. This from a firm that advises its clients to buy and hold with their other funds.

About the only prominent person still using a buy and hold technique is Warren Buffet.

Perhaps homes should be treated differently, but Laffer isn't worrying about this type of capital gains when he is promoting tax cuts. He is sucking up to Wall Street traders, the one's who have kept his career as a pundit going.

[reason]

dood
given that most people are making capital losses now, I would have thought (logically speaking) that capital gains taxes are fairly irrelevant. It might depress you though.

[reason]

I suspect actually that DOOD is facetious. Probably Calmo in disguise.

[argus]

Arthur Laffer recently relocated to Tennessee, citing among lesser reasons the state's lack of an income tax. However, had he done any research at all, he would have found Tennessee Code Title 67, Chapter 2, which is entitled "Income Taxation."
I think this shows quite clearly how much effort he puts into his "research."

[tgSF]

A minor point, but the article is inaccurate:
trader Jeff Macke DID comment, and said he'd gladly work all day long, every day, if there were no tax consequences.

He does speak out of his nether-region at times, and I think this was one of those times, but he did actually concur with Mr. Laffer.

[Holly W.]

Mcwop:I just want a capital gains tax rate to not penalize "non-rich" savers. Someone earning 100K, and diligently saving some money, but then paying the top marginal rate on rather meager savings strikes me as non-productive.

I agree with your statement, but realistically, for people making $100k household income, wouldn't most of their "diligent savings" be in the form of 401k or IRA accounts, with either postponed tax payments (traditional form) or no future tax payments at all (Roth form)? A person needs to be saving an impressive chunk of their income at $100k to end up with an AGI that would force them to invest in taxable accounts beyond their 401k/IRA eligibility. (I can't imagine having a household income of $100k without at least one partner having access to a 401k account.)

At the moment, our tax system tries to reward "not rich" savers by having two capital gains rates, the 5% rate for households whose top marginal tax bracket is 15% or less, and the 15% rate for households whose top marginal rate is greater than 15%. The problem with this has been the abuse of the top 15% rate by hedge fund managers and other extremely rich folks who claim that most or all of their income is really capital gains.

IIRC, regular commenter on this blog 'Reason' suggested once that rewarding non-rich savers while preventing abuse of low capital gains tax rates by the truly wealthy could be achieved by allowing a standard dollar amount of capital gains to be excluded from taxation for everyone across the board (say $20,000 or so), with all gains above that amount taxed as regular income, but I can't find his comment to that effect, so hopefully he'll read this and correct any mis-explanation I'm making here.

[reason]

Holly W.
What you are saying much spot on. In Germany every family has a standard entitlement of tax free capital income. But you missed something. I'm very keen on excluding inflation from capital income.

[reason]

But by the way capital gains taxes require difficult accounting (they are administratively difficult). It may be better to move to progressive consumption taxes and higher inheritance taxes. Just a thought.