Why capital gains should be taxed as income

By Felix Salmon
June 5, 2013

Last week’s Munk debate featured one of those strange-bedfellow moments, when Paul Krugman agreed with Art Laffer that the tax rate on capital gains should be the same as the tax rate on income. (In fact, Laffer went one step further than that, saying that even unrealized capital gains should be taxed at the same rate.) Normalizing the capital-gains tax rate so that it’s the same as the income-tax rate is an easy way to bring a lot of money into the public fisc — some $161 billion per year, according to the CBO. So why aren’t we doing it?

Evan Soltas does his best to answer that question with his “Defense of the Capital-Gains Loophole”. Here’s the meat of his argument:

Most tax breaks create distortions. The tax break for capital gains does the opposite: It reduces a distortion. Investment is really deferred consumption. Taxing consumption tomorrow at a higher rate than consumption today — which is what a tax on investment income does — encourages people to shift consumption forward in time, and that’s inefficient.

This doesn’t make a lot of sense. Firstly, investment really isn’t deferred consumption. The amount of money invested, in the world, is going up over the long term, not down — which means that once you look past the natural tidal movements of money in and out of various investment vehicles, it’s reasonable to say that money, once it gets invested, stays invested. Pretty much forever. The amount of money being saved, plus the amount that the investments have grown, is nearly always going to be greater, in aggregate, than the amount of money being withdrawn for the purposes of consumption. That’s the inefficient thing: money that could be cycling through the economy at high velocity is instead tied up in investment vehicles, and might not be spent for decades, if at all.

Soltas comes up with an example to show that if I invest my money today and then spend it in ten years’ time, then I’m going to end up being taxed at 50% — a higher rate than the 40% income tax. This example is a subset of the annoying dual-taxation meme. But in any case it ignores the much bigger amount of dual taxation which goes on with regard to spent money.

If I earn money and spend it today, my spending is going to become someone else’s income. If that person then pays tax on that income and spends the remainder, we’ll get yet another round of income tax out of it. And so on and so forth. It’s a constant high-velocity money-go-round, which is driving tax revenues all the way. By contrast, if my money is tied up in savings for a decade, it’s not generating any tax revenues at all. As a result, saved money generates much lower tax revenues than spent money. At the very least, then, it should be taxed at the same rate as spent money.

That said, savings do have an important role to play in the economy. Do we want to endanger that? Here’s Soltas again:

In theory, this is a strong disincentive for saving and investment, leading to less accumulation of capital and lower incomes over time. The empirical evidence is admittedly less impressive. Still, this reasoning explains why economists leant towards a preferential rate of capital-gains tax in a recent survey.

My theory is that economists lean towards a preferential rate of capital-gains tax for two reasons: they like theory over reality, and they tend to be rich people with capital gains income. The fact is that there’s really no empirical evidence to suggest that raising the capital gains tax to the income-tax rate would actually reduce savings; neither is there any good evidence to suggest that if savings were reduced, then incomes would trend lower over time. In order for the capital-gains loophole to be justified, we would need to be reasonably certain on both counts. We’re not even close to certain on either: my feeling, indeed, is that both are downright false.

Soltas does have a good point that capital-gains taxes become particularly onerous when inflation rises — an asset with zero real growth can still be subject to large capital gains if it’s held over an inflationary period. As a result, I’m open to persuasion on the idea that capital gains should be adjusted for inflation before being taxed. But the bigger picture is clear: as Soltas himself explains, “the capital-gains tax ignores investments in human capital and thereby creates a disincentive for that particular form of investment”. Unless and until Soltas can come up with what he calls “an equivalent subsidy for human capital”, we should treat all income equally for tax purposes — whether it comes from income or whether it comes from capital gains.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
33 comments so far

I was with you until you suggested adjusting capital gains tax rates to accommodate inflation.

For starters, to do so brings greater complexity to the very tax code you’re trying to simplify.

And, you realize that the people who would benefit most from inflation-adjusted gains — the richest — negates the benefit of eliminating this preferential tax treatment.

Finally, if Solitas were correct — that matching gains taxes to that of regular income would distort the economy by encouraging spending today — then said inflation would immediately devalue current purchases and that spent income would be without the benefit of gains (from investment, less taxes). The point being, you can’t have it both ways.

Posted by GRRR | Report as abusive

“My theory is that economists lean towards a preferential rate of capital-gains tax for two reasons: they like theory over reality, and they tend to be rich people with capital gains income.”

You are definitely getting funnier, Felix, that comment is in Jon Stewart territory.

Soltas is wrong. Capital gains tax breaks are giant distortion generators. They allegedly encourage investment, but really mostly reward speculation. Buying $1 million worth of Apple stock does not have the same effect on the economy as using that $1 million to develop a new phone or computer. Defenders of the break like to say that people who invest in new ventures need the additional break to make the investment more attractive; even if that were true (it’s not), it still results in probably 99% of all capital gains tax breaks being taken by people who buy and sell stock or real estate, or similar assets. That distorts the tax system and investment in new ventures, and doe snot result in new jobs or even the same economic activity as a new company would generate.

I’m okay with taxing capital gains as ordinary income, but I think a rate that is inversely proportional to how long the asset was held would be even better. The economy benefits when assets are held for longer periods of time, and suffers when there is constant turnover: executives focus on short term results, which is always bad for companies, and excessive trading leads to bubbles. Flipping assets, especially real estate or even commodities, causes spikes in asset values, which can be dangerous destabilizing when debt (leverage) is involved, as that amplifies the risk, which is now often shouldered by TBTF banks.

If someone starts a company that goes public, and their shares are worth $10 billion, but they never sell their shares, they haven’t extracted any wealth from the economy. We should encourage that behavior, and we can do that by rewarding those who hold assets a long time. However, if somebody makes $2 billion a year for five years buying and selling stocks and other financial instruments, they have actually taken $10 billion out of the economy, and that should be taxed a lot differently. Not only did they not create anything of value for anyone but themselves, they took money out of circulation.

As for Laffer, that comment about taxing unrealized gains had to be a PR stunt. He can’t possibly believe in such a system, which would force people to constantly sell not just shares of appreciating stock, but also their privately held businesses, or they would have to get their homes re-financed. Laffer, right? He wants people to laugh? Felix’s joke was much funnier.

Posted by KenG_CA | Report as abusive

That may not have been Soltas’ best article, but your response is even weaker.

Soltas wasn’t talking about aggregate investment and aggregate consumption. He was talking about individual investment and individual consumption. For an individual, what is the purpose of investing and saving? The purpose is to have more money in the future to spend on things (i.e. consumption) for you or your family.

You criticize his “dual-taxation meme” without attacking his actual argument. The whole point is that your tax on consumption today is less than the tax on consumption tomorrow under a capital gains tax. Economists who favor eliminating capital gains taxes favor it because they prefer taxes on consumption to be the constant regardless of when the consumption occurs. Saying that he ignores other taxes itself ignores the whole point of his argument, which is about different tax rates through time.

An alternative is to raise the Roth IRA contribution limit (anything above 25,000 per year would cover the saving habits of a substantial part of the population) and make it so that money can be removed without penalty. That would effectively eliminate any worries about the capital gains tax for all but very high income earners.

Posted by jmh530 | Report as abusive

Also, this. http://www.interfluidity.com/v2/4316.htm l

Especially this:

‘This whole conversation started with questions about whether the S ≡ I identity somehow implies that real-world savings vehicles are necessarily matched by investment in the Ramsey/Chamley/Judd sense. The answer to that question is unequivocally and irrefutably “no”. Real-world savings vehicles need not be matched by any investment whatsoever. Suppose I purchase shares in a mutual fund which then lends it on as consumer loans that finance vacations. In a macroeconomic sense, there is neither savings nor investment, my saving is matched by vacationers’ dissaving, resources are consumed and none are invested. S ≡ I = 0 Nevertheless, my shares in the fund would yield returns in forms like dividends, interest, and capital gains. No matter how hard you squint at accounting identities, nothing in the logic of Chamley and Judd suggests that these “investment returns” should remain untaxed. Lending to finance private and government consumption represents a significant fraction of gross financial savings, even though it contributes nothing to net savings or the aggregate investment Chamley and Judd presume.’

Posted by Zdneal | Report as abusive

The capital gains tax rate creates a HUGE distortion – it creates an incentive to “convert” ordinary income into capital gains income.

As for Laffer, IMO what he is advocating is taxing wealth, rather than income; this might be his first idea on tax worth considering.

Posted by NotAnEconomist | Report as abusive

This is fantastically incoherent, Felix, even by your standards. The best sense I can make of this is some kind of money illusion on steroids. If you’re thinking about anything economic in terms of money, and can’t even imprecisely recast it in terms of real goods and services, you’re probably making an mistake.

Posted by dWj | Report as abusive

You should delete this comment. While it is a great idea to unify tax rates, your analysis is ludicrous. Your denial that savings is future consumption is too hilarious. The only benefit of the comment is for teaching.
If people read your comment they will presume that it is a bad idea to unify tax rates because anyone who believes what you wrote cannot be serious.

Posted by bwickes | Report as abusive

When a homeowner sells a house for more than the purchase price that is a capital gain on the sale of a capital asset.

Do you consistently apply your logic and say homeowners should pay taxes at income tax rates on the gain from the sale of their residences?

Posted by MiltonRecht | Report as abusive

How about an even simpler idea — tax consumption, not income. Set the rates high enough that you can give people a rebate on the first $XX of consumption per person in the household. Exempt nothing (unless you think it would be easier to tax housing differently).

Posted by TFF | Report as abusive

TFF, don’t you think that will hurt renters more than homeowners?

What about wealthy people with lots of income who don’t spend anywhere near what they make, and end up just accumulating it? For example, take one hedge fund manager who makes 100M/yr and spends 10M of it, so only pays tax on the 10M (for some reason, the dollar sign key on my keyboard doesn’t work, even though the 4 does, and every other shifted key does) he spends. Then take 2000 people who earn 50K/yr, and spend it all and pay tax on the 100M. The manager has extracted 90M from the economy, and only paid tax on 10M, while the 2000 workers kept all of their earnings in circulation, and paid tax on all 100M. Don’t you think that would be better for the economy?

Posted by KenG_CA | Report as abusive

+1 each to jmh530, dWj, bwickes, and TFF. So many muddled ideas here confusing individual versus aggregate decisions and treating “saving” as if it is just stockpiling cash in a vault. On the latter point – Felix assumes that “spending” is someone else’s income but “saving” is not. What about purchases of capital goods?

Then, there’s “neither is there any good evidence to suggest that if savings were reduced, then incomes would trend lower over time.” This one is simply astounding. Is Felix really saying that he sees no link between (i) rates of savings and rates of investment and (ii) rates of investment and productivity/income growth?

Posted by realist50 | Report as abusive

@Felix “Firstly, investment really isn’t deferred consumption.” Actually that’s EXACTLY what it is. If I’m lucky enought to get a bonus I can do three things with it… I can spend it (consumption) I can pay down debt (deleverage) or I can invest it.

@TFF… I wish you were supremo leader of the whole world. Tax the heck out of things we want less of like consumption, pollution, alcohol, tobacco, gambling… tax things we want more of (like work or investment) less or not at all. Easy way to make the world a better place and boost prosperity.

Finally… I give up… the hell with it… go ahead tax capital gains at ordinary income. See how far your 161 billion gets you… knock your self out. THEN WILL YOU BE SATISFIED THAT YOU HAVE ENOUGH?

(We all know the answer to that question.)

Posted by y2kurtus | Report as abusive

y2k, why do we need people to trade stocks and real estate? or derivatives? You want to tax the gains on those things less, but we don’t need to do that, when people trade them there is no benefit to society.

Really, what is going to happen to the economy if people have to pay 40% on their trading of stocks? Don’t you think there should be a distinction between original investment (i.e., creation of the asset) and speculation (trading of the asset)?

Posted by KenG_CA | Report as abusive

“TFF, don’t you think that will hurt renters more than homeowners?”

Hard to know how to tax housing consumption (and since it is the largest expense for the wealthy it is important that it be captured). Taxing construction can be a piece, but doesn’t really suffice. Property taxes may be the best way to go, and presumably are passed through to renters by the landlords.

“What about wealthy people with lots of income who don’t spend anywhere near what they make, and end up just accumulating it?”

Estate taxes? You can’t take it with you…

Posted by TFF | Report as abusive

TFF, but you’re suggesting taxing consumption, which implies taxing rent or mortgage payments (I’m assuming the latter for owners; if you taxed the sale price, it would only happen once). Property taxes at the federal level would be pretty unfair to those in states with high property values.

Estate taxes may not get paid for a longggg time… In the meantime, the economy gets starved.

Posted by KenG_CA | Report as abusive

@KenG, you need to think it through a little more carefully. Rent payments are simply NOT the equivalent of mortgage payments. Many homeowners have no mortgage at all, yet they are consuming just as much housing as those who do. Mortgage vs. cash vs. renting is strictly a finance decision, not a consumption decision.

You could perhaps tax new construction, and maintenance, and additions. This is surely the simplest approach. But to be fair, you wouldn’t tax either rent or mortgage payments. Or at least you would allow some sort of depreciation to be accounted against the tax on rents. But a property tax may be the fairest approach for real estate. You are taxed on the value of what you consume.

States with high property values? When you tax income (on a progressive scale at that!), you already hit them harder. Please explain how this would be any different? If you live, earn, and spend in a high-cost state, then you are absolutely going to owe more taxes. I can’t imagine a taxation system that doesn’t produce that result. Moreover, this is part of why the US is in better shape than the EU. The high-income states subsidize the rest.

Your other concern is also misplaced. Under the current system, the wealthiest individuals delay taxation indefinitely through unrealized capital gains, and upon their death (after estate taxes) their heirs receive a stepped-up cost basis. The upper middle class postpone taxation into their 70s through 401k plans. This wouldn’t be effectively any different.

Tax consumption instead of income, and you have the perfect excuse to slap a similar tax on the entire value of the estate. Failed to consume it? Fine, we’ll tax it anyways. Potentially a very simple system.

Realize that paper wealth has no fundamental value, until it is consumed. Our present system works to delay the recognition of income until we need that income for consumption. Taxing the consumption directly is simpler and essentially similar in practice.

Posted by TFF17 | Report as abusive

“Rent payments are simply NOT the equivalent of mortgage payments.” Exactly, which is why it would be difficult to implement a fair consumption tax on housing. I can think of holes in every possible system that attempts to tax housing consumption. And since housing is the biggest expenditure by far for most people (especially those in lower income brackets), the tax burden is not evenly distributed, further exacerbating the already narrowing distribution of income.

The ratio of housing prices to income is not proportional in all states, so a federal property tax would be more uneven than the income tax. Somebody earning $40K a year in Texas may own a home valued at $125,000, but it doesn’t take a $160K annual salary to own a similarly sized $500K home in CA. Yes, the California tax payer is currently paying more in income taxes, but not 4x that they would pay based on home value.

I don’t view unrealized capital gains as income, and judging by your last paragraph, neither do you. I’m speaking strictly about taxing realized capital gains, most of which are the result of speculation, not investment (I got into this argument a long time ago on one of Felix’s posts, we can rehash that if you think there is no difference between the two). A trader or hedge fund manager or real estate flipper is not pulling down 8 or 9 figures worth of unrealized capital gains; their income is all short term capital gains (or worse, carried interest), and I don’t see how not taxing that income, just because they haven’t spent it all, benefits the economy.

We’re in agreement on estate taxes, but wealthy people live longer, so taxes get really deferred, and in the meantime, all that money is idle. I’m all for deferring tax on income that is re-invested, but not in existing assets, as that does not generate economic activity, it just shuffles bits (not even paper) on a bunch of computers.

Posted by KenG_CA | Report as abusive

“Yes, the California tax payer is currently paying more in income taxes, but not 4x that they would pay based on home value.”

Not sure why you are focusing so narrowly on this piece of the picture. Isn’t this the kind of reasoning that created the Hydra that is our current tax system? If the California tax payer pays 4x as much overall, then he is spending 4x as much and surely earning 4x as much as well.

Will also note that your Texas taxpayer presently pays no federal income tax. Your California taxpayer pays easily more than 4x that.

“further exacerbating the already narrowing distribution of income”

Thus the per-capita rebates, for those living and working here legally. Or use them to fund Social Security (with the same effect). A consumption tax can still be constructed with a personal exemption.

Your concept of a sliding scale on capital gains (based on the term of investment) is intriguing, but also focuses on too narrow a segment of society. I’m at least as outraged that I am allowed to trade frequently (perhaps 10% turnover per month) while paying NO tax on the gains at all. That’s what a 401k does for the upper middle class.

Look into “estate planning” some time. There are myriad dodges that basically amount to skipping out on the capital gains tax. The concept of taxing income is so fundamentally broken/exempted that ANYTHING would be an improvement. Every complaint you have about my proposal applies at least as strongly to the current system.

Posted by TFF17 | Report as abusive

Reasons to tax consumption instead of income:

(1) It is simpler. We spend tens or hundreds of billions of dollars on differentiating income that should be taxed from income that shouldn’t be taxed from income that should be taxed preferentially from income that should be taxed thirty years in the future. This is a windfall for Wall Street and the banks, especially when people save with one hand while borrowing with the other, but it makes no sense as national policy.

(2) There are fewer producers than consumers. If you tax consumer income, then you need to process a couple hundred million tax returns. Tax producers and you are down to 30-50 million (all of which already need to file income tax returns), so it really is no more work for them.

(3) Much harder to evade a consumption tax than an income tax. The upper middle class hide a large fraction of their small-business income by simply not reporting it. The wealthy hide a large fraction of their income by shuffling it through shell corporations, borrowing against investments, etc.

Posted by TFF17 | Report as abusive

“Not sure why you are focusing so narrowly on this piece of the picture. ”

Because some people spend half of their income on housing. And those people are the most likely to not have health insurance.

Yes, Texas has lower state taxes than CA, which means they offer less services to residents. While Texas talks alot about how little they tax and regulate (except when it comes to selling electric cars or letting people store explosives), there still isn’t a mass migration from CA to TX.

You suggest rebates, but that further complicates the system, and provides another hole for gaming and cheating.

Yes, the sliding scale focuses on a narrow segment of society, but it is that narrow segment that reaps most of the gains (I feel comfortable estimating that 90% of the gains are received, not earned, by 10% of the population. And not taxing gains exempts a huge amount of income that is essentially wealth extracted from the economy.

Sure, there are dodges in the tax system. But I thought since we’re talking about making changes, we could eliminate them at the same time. :-)

Posted by KenG_CA | Report as abusive

TFF, 1) I don’t think it will be any simpler. As you admit, there has to be adjustments for the inequities, and then, how is the tax collected? What is exempt? What rate, will it be like a VAT in Europe?

2) We’re all producers now, and there will be more of them, as we shift to more self-employed and people with businesses on the side. In any case, the difference in returns is far less than an order of magnitude, and still a very large number.

3) Can’t argue that, except when things are paid in cash. It won’t go away, you know, and a tax that a producer has to collect will provide more incentive for cash transactions.

My biggest problem (besides the regressive nature of a consumption tax, but that is a values issue, not a technical one, which I prefer to address) with a consumption tax is that it further encourages hoarding of profits and income, which is deadly to an economy. It’s great when people save for their retirement or future big purchases, but when they save more money than they could possible spend in 10 or even 100 lifetimes, it weakens the economy. A consumption tax reinforces the habit of hoarding, as there is no penalty.

Posted by KenG_CA | Report as abusive

“You suggest rebates, but that further complicates the system, and provides another hole for gaming and cheating.”

A rebate on the first $10k of consumption per legally resident person requires simple counting. Much easier to count people than to count income, and MUCH easier to count legally resident people. No system is perfect, but it is hard to cheat the system on this proposal. Note that the rebate would be separate from the tax collection channels.

“What is exempt?”

Financing. Charge the purchase, not the payments. Rent, like mortgage, is essentially financing.

“Texas has lower state taxes than CA”

Read again, that isn’t what I said. A household earning $40k to pay for a $125k home does not pay federal income taxes. A household earning $120k to pay for a $500k home does pay federal income taxes. The ratio of the federal income tax is much larger than the 4:1 ratio in their home values. This has nothing to do with state taxes.

“What rate, will it be like a VAT in Europe?”

The VAT system seems to work okay. What rate would be needed to replace revenues from the income tax if financing payments were exempted and there were (effectively) a $3.5B exemption for the per capita rebate?

“A consumption tax reinforces the habit of hoarding, as there is no penalty.”

Isn’t under our present system either. Am certainly open to other ideas, but taxation of income isn’t effective at addressing that issue — people simply invent ways to avoid recognizing income.

Posted by TFF | Report as abusive

So if I bu a home with cash, I don’t have to pay any consumption tax on it, but those who need a mortgage do? And will landlords break down the amount of financing that they are paying as part of their rent?

I think people earning $40K/yr in Texas pay federal taxes.

The VAT system sin’t working o.k. in Europe, they have an income inequality problem there that is as worse, or worse, than the U.S., and VAT makes it worse.

Should I repeat my proposal for a tax system that penalizes hoarding?

Posted by KenG_CA | Report as abusive

>>in Europe, they have an income inequality problem there that is as worse, or worse, than the U.S.,

Posted by dtc | Report as abusive

Where did the rest of my comment go?

Oh well. Anyway, try again – look at the tables of Income Inequality on wikipedia. The US is 4th from bottom – above Turkey, Mexico, Chile. The top countries for lowest income inequality? All European….

Posted by dtc | Report as abusive

dtc, that is true, but I should have expanded more on that comment. I was thinking about the EU as a whole, where some countries have higher incomes than others, and they all share a common currency, just like the different states in the U.S.. However, the poorer members of the EU cannot improve their standard of living like the poorer states in the U.S., because they have separate governments, and they can’t print money. German citizens don’t want their tax dollars to help out people in Greece, but a disproportionate share of my tax dollars are spent by the federal government in southern states. This (partially) offsets the income disparities between states.

Deficit spending is a systemic response, by a government, to insufficient individual incomes. These nations can’t do that, so instead they turn to austerity, which shrinks the economy and is exacerbated by a reliance on the VAT (less spending -> less taxes collected -> even less spending). I probably should have said Europe has a weaker economy than the U.S., instead of an income inequality problem, but I think the two are inseparable. When there is not enough money to be spent by individuals, the economy shrinks.

Posted by KenG_CA | Report as abusive

Well, the gains rate went up higher than it was. What happened? Make it higher….extrapolate from there.

Posted by elpea123 | Report as abusive

“So if I buy a home with cash, I don’t have to pay any consumption tax on it, but those who need a mortgage do?”

When I suggested that financing be exempt, I meant that financing would be exempt. As in no tax. I’m not sure how that is ambiguous. What is the question?

If you tax new construction (the simplest approach, since you are already taxing all goods and services in the economy), then then there is no differentiation between buying cash, buying on a mortgage, and renting. The downside of this is that existing housing stock doesn’t get taxed (though renovations would be). This isn’t different from any other capital good, but housing is obviously the most significant long-term capital good in the consumer economy.

If you tax property values, either at the federal, state, or local level, then there is again no differentiation between buying cash, buying on a mortgage, and renting (presuming that landlords pass their costs through to renters). Obviously the property tax would be set at a different rate than the consumption tax, since only a fraction of the value of the property is “consumed” each year. That might lead to double-taxation of new construction, but I’m not going to fret too much over that…

In contrast, the current income tax system treats cash purchases, mortgaged purchases, and rentals very differently. If you buy cash, then the proceeds of that wealth (in this case a steady supply of housing) are tax free. This is a huge tax break for the wealthy who would otherwise owe taxes on that income. If you mortgage your purchase, then the mortgage interest is tax deductible. This is a huge tax break for the upper middle class, who deduct their mortgage payments with one hand while they shelter their income (for decades!) in tax-deferred accounts with the other hand. Renters get no tax deduction on their housing cost. Assuming that landlords pass costs through to renters, they report financing costs as both as positive (rent received) and deduction (interest paid) on Schedule E. Tax neutral for landlords. But unlike owners, the renters do not get a Schedule A deduction on their housing. (This is a big part of why anybody who CAN afford to buy SHOULD afford to buy. As Felix notes, that might not be the best policy.)

Posted by TFF17 | Report as abusive

Duh, my mistake. But there are other ramifications – wealthy people who pay cash for existing homes (multiple ones, at that) would pay no consumption tax on their purchases. I think there will be many ways to game this system.

I’m not a fan of the current tax system, so I won’t defend it.

Do we tax food?

Posted by KenG_CA | Report as abusive

Tax everything, give rebate sufficient to cover basic needs. Saves on the argument over specifics.

In theory, taxing new construction drives up prices on existing homes (or drives down the net price of new homes), so from the point of view of the consumer it doesn’t make a difference whether you buy a new home or an existing home. Hard to game that.

In practice, the housing market is not monolithic. A (large) tax on construction would potentially depress new construction, with distortionary effects. This is why I would prefer to tax property consumption rather than property construction — but then you get into the knotty question of how to tax everything BUT new construction. And open Pandora’s Box of exceptions to the tax code.

Posted by TFF17 | Report as abusive

Consumption taxes are a terrible idea. We want to encourage consumption rather than having our ability to purchase goods and services tied up in financial instruments. Since 1980, there has been no economic growth in the US. All the potential has spent on symbolic goods rather than providing the things that people can use.

Of course, the correct approach is a wealth tax on all private property, perhaps with some modest deduction. After all, private property is a government service, so the more of it one uses, the more one should pay. If people don’t like paying the government, they can just give up all government money, shares of government chartered collectives and government administered real estate. No one say says you have to own anything.

Posted by Kaleberg | Report as abusive

@Kaleberg, the biggest problem with taxing property is the question of how to value it. While conventional financial instruments are easily valued, there are a ton of unconventional financial investments that are not. Real estate is not easily appraised. Partnerships are even trickier to price.

And what price would you put on my business? I sell my personal services — my reputation and client list definitely have value, at least as long as I care to run the business, but I’m not sure how you would begin to calculate it. Would you only tax tangible assets?

Almost anything is better than our present system, which purports to tax income, but is so ridiculously riddled with loopholes and exemptions, and definitions pertaining to the recognition of income, that somebody like Mitt Romney can drive a $10M bus through them tax free.

Posted by TFF | Report as abusive

Debating the merits of aligning the Capital Gain tax with the income tax rates misses the point. What is really needed is comprehensive tax reform where capital gains and income taxes are part of the debate. Only then can we create a tax regimen that will address our country’s needs and be fair and balanced.

Posted by ponder | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/