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What in the name of Schumperterian capitalism is going on? I would say the economics of this piece by Wick Allison over at The American Conservative is just flat-out wrong, but the post contains no economics at all:
A capital gains tax rate (making money off money) that is lower than the earned income rate (making money off work) is just not fair. Bestowing that rate on hedge-fund managers through a specially designed loophole is just not fair. Allowing the rich to take mortgage deductions for second and third homes, or for homes worth over $1 million, is just not fair. Allowing business owners like me to take myriad deductions that our employees cannot take is just not fair. But, most of all, allowing the wealthy to pay very low tax rates while interest on the war debt accumulates, deficits continue, and middle-class incomes deteriorate is just not fair.
The tax preference for capital gains income is a longstanding feature of the US tax code and for good reason. It reduces, although imperfectly, three economic distortions in the current income tax code: a) the lock-in effect, b) the tax bias against equity-financed investment by C corporations, and c) the tax penalty on savings. And keep in mind that investment income is also taxed at the corporate level, leading to very high integrated tax rates on capital gains and dividends:
There are other, better ways of dealing with those distortions, such as moving from an income tax to a consumption tax. Conservatives should embrace them. But that is not what Allison is proposing. He would make the tax code less efficient and less conducive to economic growth in the name of “fairness.” But what is so fair about less income and fewer jobs? And the “fairness” argument only works if one ignores the actual economics and operation of the tax “preference,” which is really just reducing a bias against something we want more of — savings and investment.
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