Capital Gains Cuts: Why the Ryan Tax Plan Goes in the Exact Wrong Direction

As The Atlantic points out, Mitt Romney would pay 0.82 percent in taxes under the Ryan Plan.  (Mitt himself pointed that out in the primaries when it was Newt Gingrich trumpeting the plan.)  And of course, the plan is a non-starter when it comes to funding Federal obligations.  Unless Romney plans to cut military spending in half, and cut social security to boot, there's nothing left to fund anything else.

But the real issue, to me, is the source of the tax cuts: capital gains. We have an economy whose prime dysfunction comes from the fact that financial markets have become a casino.  The fact that the current tax plan favors capital gains over wages (with a 35% marginal tax on wages, but only 15% on capital gains) helps boost the financial economy rather than the real economy.

I haven't done the math on how much additional revenue would be gained, but from the point of view of equity and incentives, I'd leave capital gains rates as they are but greatly extend the time horizon for "long term" capital gains.  (Short term capital gains from financial instruments held under a year are taxed the same as wages (leaving out social security and other taxes added to employment income), but gains for property held longer than a year are considered long term, and taxed at the 15% rate.)

I'd set the threshold for long term capital gains at five years (at least).  There's a big difference between owning a home, or a business, for many many years, and then having a one-time gain that represents a lifetime of investment, and  holding a stock for a year, and juggling a stock portfolio to hold that stock just long enough to get favorable tax treatment when you sell it.  The idea that a year is "long term" is laughable to anyone who really thinks long term.

I'd also tighten down all the loopholes that allow people to avoid paying even capital gains by borrowing against the value of a security.   One rich friend remarked that he's never paid taxes.  He bought a building in Manhattan when he was in college; its value has increased by tens of millions of dollars (perhaps more), which he's taken out as loans against the value of the building.  The same is done with equity in companies, and a whole class of specialized financial instruments have been created to hedge against the downside risk.  I'd bet that many titans of industry have bought their yachts with tax-free dollars taken out in just this way.

The point is that if we want to rethink the tax system, we need to get beyond simplistic models that cut, cut, cut, and figure out all the places where taxes highlight our wrong-headed social strategies, and fix those problems.  I'd start by rethinking the incentives that reward the behavior than nearly broke the world economy, rather than doubling down on them, encouraging even more financial sociopathy.

The Ryan Plan rewards everything that is wrong with our economy, and the fact that Mitt Romney picked Paul Ryan as a running mate indicates as surely as anything does that Mitt is the wrong guy to tackle today's problems.
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