Someday, Americans who earn millions upon millions of dollars each year will no longer pay taxes at a lower rate than the middle class and the merely affluent. Someday. But not this year, and with 2008 being an election year, probably not then either.
The Washington Post reported this week that the Senate will not advance a proposal this year to raise taxes on private equity partners, the deal makers who have become multimillionaires and billionaires mainly via debt-driven buyouts of public companies. The partners pay a flat tax rate of 15 percent on most of their earnings, compared with rates as high as 35 percent for most everyone else — say, firefighters, nurses, doctors, teachers and soldiers. A spokesman for the Senate majority leader, Harry Reid, told The Post that time appeared to have run out to act this year and that, in any event, the issue needs more study.
Of course we all know that these "multimillionaries and billionaires" collect their millions and billions and bury it in the back yard, never to be seen again, don't we? They benefit no one. Zero sum, all investments create large returns, no risk involved.
And besides, if you listen to some commenters on another thread, it's all the government's money anyway and it "allows" you to keep some, so it shouldn't be that big of a deal when it chooses to no longer allow that, right? If that seems rather obviously silly to you, it is just a little less sophisticated way of saying what the NYT is saying here.
How dare they only have to pay 15%?
But that aside, it seems there's a very practical political reason that Harry Reid and the Democrats plan to delay any such tax increase. Election year politics and campaign contributions:
That decision has all the signs of a delaying tactic to avoid raising taxes on an industry that is a heavy campaign contributor. Mr. Reid controls the Senate calendar, so he could make time if he wanted. And several Congressional hearings have made it clear that there is no justification for private equity’s low tax rate. Its legality rests on outdated provisions of the tax code that should be changed. It is morally indefensible. And it is illogical from a tax perspective.
The law rewards investors for taking risks with their money by allowing them to pay taxes on their profits at a special low rate of 15 percent. But private equity partners are, by and large, managing other people’s money. As money managers earning performance fees, they don’t deserve an investor’s low tax rate.
Yup, "by and large" they're helping others risk their money wisely and reaping a reward for doing so. And the NYT has decided that as money managers who provide this service to others, they don't 'deserve' that tax rate.
Deserve? Who in the hell are the NYT to decide who does or doesn't "deserve" anything?
What is morally indefensible here is the premise that there is a right to a certain amount of money other people earn simply because they don't feel they "deserve" it. How arbitrary is that?
Just as arbitrary as most of this monstrosity we call a tax code. And, as is obvious, politicians play politics with it all the time. Tax breaks for favored constituencies are common and plentiful. And, of course, we've seen attempts at social engineering as a part of tax law over the years as well.
So we have the NYT whining about the Democrats refusing to raise taxes on a class they feel is unworthy of the rate they pay (for no other reason that they don't feel they "deserve" it) and the Democrats delaying an increase because, well, you know, these guys are big political contributors and there's plenty of time to kill this particular goose when the political winds are more favorable and they don't need the cash as badly.
And what is the one phrase not to be found anywhere in the NYT lament?
Paul Graham calls the thinking underlying the Times article the "Daddy Model" of economics:
Because of the circumstances in which they encounter it, children tend to misunderstand wealth. They confuse it with money. They think that there is a fixed amount of it. And they think of it as something that’s distributed by authorities (and so should be distributed equally), rather than something that has to be created (and might be created unequally).
What is morally indefensible here is the premise that there is a right to a certain amount of money other people earn simply because they don’t feel they "deserve" it. How arbitrary is that?
While I’m not going to defend the NYT’s point of view with regard to what is "fair," I think a reasonable argument can be made against the special capital gains rate, in that it is economically distorting. Our taxes are levied on income, but our laws do not treat all income equally. Why should capital gains be legally preferred over wages? Heck, that might even incentivize less economically productive activities (trading around assets) than working a regular job (making stuff, providing a service etc.) To me, the tax code status quo seems just as arbitrary as NYT’s attempts to define fairness.
Well, there’s a very good reason why Cap gains are taxed lower than income, so let’s not play the Times’ game and assume that one form of producitivity has more value than another. I don’t think you’ll be able to find much in the way of economic theory to back you up there.
That aside, this particular instance is a distortion because their compensation is coming in the form of cap gains and it is really income. While being careful to avoid throwing out the baby with the bathwater, we probably ought to address this.
I say this as a 25-year Wall Street veteran and one viscerally opposed to all but the flattest tax rates.
"I think a reasonable argument can be made against the special capital gains rate, in that it is economically distorting."
That would be true if the basis of our economy and the creation of wealth in general was CONSUMPTION, not PRODUCTION. Without production (which can only come from capital) there is nothing to consume. In this, Keynes was completely inverted.