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Politics : Mainstream Politics and Economics -- Ignore unavailable to you. Want to Upgrade?

To: Broken_Clock who wrote (50272)	8/5/2013 10:53:12 PM
From: TimF	Read Replies (1) \| Respond to of 85487

Yup, nothing wrong with a couple of billionaires buying off congress. In addition to anything else that might be wrong with it, one thing that's wrong with it is that its a fantasy that some take as reality. Link to supporting facts You don't provide any facts for your side. Common sense would say that it does, taxing something discourages it, even more generally increasing costs without increasing return reduces supply. Beyond commons sense (and basic econ 101) -- "We examine the determinants of venture capital fundraising in the U.S. over the past twenty-five years. We study industry aggregate, state-level, and firm-specific fundraising to determine if macroeconomic, regulatory, or performance factors affect venture capital activity. We find that shifts in demand for venture capital appear to have a positive and important impact on commitments to new venture capital funds. Commitments by taxable and tax-exempt investors seem equally sensitive to changes in capital gains tax rates that decreases in capital gains tax rates increase the demand for venture capital as more workers are incented to become entrepreneurs. Aggregate and state level venture fundraising are positively affected by easing of pension investment restrictions as well as industrial and academic R&D expenditures. Fund performance and reputation also lead to greater fundraising by venture organizations." ideas.repec.org In an influential 1998 study Harvard Professor (and Obama supporter) Josh Lerner and his coauthor Paul Gompers found that capital gains tax cuts increased venture capital investments, driven by higher rates of entrepreneurial activity. They measure investments as how much money Venture Capital funds raise each year in commitments. The link between the capital gains tax and venture capital commitment is so strong that it is visually detectable, which is rare in economics. Here is the graph, which only goes up to 1994. Let me update the Lerner, Gompers graph through 2012. I will use Venture Capital investments as a share of GDP rather than the absolute amount (results are unchanged if the absolute amount is used). I will rely on the left-leaning Tax Policy Center for the historic long-term capital gains tax. Data for total U.S Venture Capital commitments is from the textbook Entrepreneurial Finance up to 1995 and from PricewaterhouseCoopers until the first half of 2012 (both are based on Thomson Reuters). Again we see a remarkably strong association between the capital gains tax and Venture Capital Investments. Following tax cuts in the late 1970s Venture Capital fund-raising explodes. The tax increase a decade later is followed by a decline in committed fund. Investments again increased when Clinton cuts the capital gains tax in the late 1990s. The Bush-tax-cut - which the left claims had no effect - is also followed by an uptick in Venture Capital investments as a share of GDP. This methodology is as I mentioned crude. I use it because Professor Burman used an even cruder method (correlating capital gains taxes with GDP as a whole). By the standards left-of-center economists themselves have defined, I can indeed detect a strong negative correlation between capital gains taxes and a strategically important component of economic activity. The correlation between the capital gains tax rate and VC-investments as a share of GDP 1970-2012 is -0.45. (The correlation is even stronger if the outlier year 2000 were to be excluded). ... Regardless of the economics, isn’t it unfair to tax “unearned” capital gains at a lower rate than wages? First, capital gains of entrepreneurs are hardly “unearned”. Innovative entrepreneurs produce more economic value in relation to their income (even if the income is in billions of dollars) than other groups in the economy. This furthermore ignores double taxation. The capital gains tax is only part of the total tax burden, the company where capital gains are generated also has to pay taxes at the corporate level. The effective corporate tax rate is estimated at 27%. When Mitt Romney pays a visible capital gains tax of 15%, his total tax burden including the corporate tax is on around 38%. The impression that capital gains taxes are unfairly low is based on the government hiding much of the statutory capital tax burden through fiscal obfuscation. super-economy.blogspot.com In 1968-81, when capital gains taxes gradually rose from 25 percent to as high as 40 percent, average GDP growth fell from 3.8 percent to 3.1 percent per year (See table). Likewise, after 1987, when the rate increased from 20 percent to 29 percent, average annual growth declined from 3.5 percent back down to 3.1 percent. If Obama wants to produce more jobs, he must grow the economy. To do that, instead of hiking the capital gains tax, he must cut it. After the devastating dot-com bust and terrorist attacks of 2001, annual growth averaged just 1.8 percent. But after George W. Bush gradually cut the rate (from 21.19 percent to 16.4 percent by 2003) average annual GDP growth increased a full percentage point, to 2.8 percent. Similarly, when Bill Clinton cut the capital gains tax rate from 29 percent to 21 percent in 1997, economic growth rose from an average of 3.1 percent to 4.5 percent per year. The same thing happened when Ronald Reagan slashed the rate in half (from 40 percent to 20 percent) in 1981: average annual growth rose from 3.1 percent to 3.5 percent. In each case, economic growth brought more jobs. humanevents.com Key Points: Eliminating the reduced tax rates on capital gains and qualified dividends would: Increase tax revenues by $108 billion on a static basis; Reduce GDP by $983 billion; Actually reduce revenues by $122 billion on a dynamic basis; Reduce employment by the equivalent of approximately 1.3 million full-time workers; and Reduce hourly wages by 5.3 percent. Eliminating the rate differential and trading the static revenue gains for individual rate cuts would: Allow for an across-the-board rate cut of 9.2 percent; Still reduce GDP by $681 billion per year; Reduce federal revenues by $150 billion on a dynamic basis; Reduce employment by the equivalent of approximately 300,000 full-time workers; and Reduce hourly wages by 4.2 percent. taxfoundation.org

To: Broken_Clock who wrote (50272)	8/5/2013 10:53:41 PM
From: TimF	Respond to of 85487

Why Capital Gains are taxed at a Lower Rate June 27, 2012 By David Block, William McBride A joint hearing held by the Senate Finance Committee and the House Ways and Means Committee on June 28 will discuss capital gains taxation in the context of broader tax reform. A number of proposed changes have been highlighted; The Bowles-Simpson proposal recommends taxing capital gains and dividends at the same rate as labor income, while many congressional Democrats recommend raising the rate, citing concerns about both revenue and inequality. Any proposal focusing on raising the rate will likely fail to raise the predicted revenue, as demonstrated by both economic history and the high burden already placed on American corporations. The justification for a lower tax rate on capital gains relative to ordinary income is threefold: it is not indexed for inflation, it is a double tax, and it encourages present consumption over future consumption. First, the tax is not adjusted for inflation, so any appreciation of assets is taxed at the nominal instead of the real value. This means investors must pay tax not only on the real return but also on the inflation created by the Federal Reserve. Second, the capital gains tax is merely part of a long line of federal taxation of the same dollar of income. Wages are first taxed by payroll and personal income taxes, then again by the corporate income tax if one chooses to invest in corporate equities, and then again when those investments pay off in the form of dividends and capital gains. This puts corporations at a disadvantage relative to pass through business entities, whose owners pay personal income tax on distributed profits, instead of taxes on corporate income, capital gains, and dividends. One way corporations mitigate this excessive taxation is through debt rather than equity financing, since interest is deductible. This creates perverse incentives to over leverage, contributing to the boom and bust cycle. Finally, a capital gains tax, like nearly all of the federal tax code, is a tax on future consumption. Future personal consumption, in the form of savings, is taxed, while present consumption is not. By favoring present over future consumption, savings are discouraged, which decreases future available capital and lowers long term growth. Not only has a low capital gains tax rate worked to encourage savings and increase economic growth, a low capital gains rate has historically raised more in tax revenue. At a 2010 talk at the Cato Institute Dr. Daniel J. Mitchell and Dr. Richard W. Rahn argued that the government has actually raised more revenue with a lower long term capital gains tax rate than a higher rate. For example, in 2007 the IRS raised $122 billion with a 15% tax rate as opposed to $7.8 billion in 1977 ($26.7 billion in 2007 dollars) with a 40% tax rate. In fact, when President Bush signed into law a cut in the top rate from 20% to 15%, revenue increased from $51.3 billion in 2003 to $137.1 billion in 2007 (although it fell significantly after the 2008 financial crisis, understandably). Attempting to use the tax code to address income inequality will likely disappoint those who seek to attack the lower tax rate on high net worth individuals caused by a lower capital gains and dividends rate. Inequalities caused by globalization and differing education levels will not be remedied by destroying future investment; to the contrary those most likely to be hurt the most by lower economic growth are those with lower incomes. The intensification of international competition for lower corporate tax rates has been highly publicized, but international capital gains taxation has been largely ignored. Capital gains taxation adds another layer of taxation onto American businesses, making them less competitive. The table below shows how the U.S. stacks up in terms of the total taxation of corporate investment. The first column shows the U.S. capital gains rate (federal plus state) is above the OECD average. Thirteen countries in the OECD have no capital gains tax. The second column shows that the U.S. integrated capital gains tax rate (corporate rate plus capital gains) is the 4th highest in the OECD. This burden will rise to the highest in the OECD starting January 1 if the Bush tax cuts are allowed to expire and the Obamacare investment surtax of 3.8% goes into effect. The combination of history, international competition, and the destructive nature of the capital gains tax suggests any attempts to raise revenue by raising rates are doomed to failure. The focus on June 28th should not be on raising the capital gains rate, but should instead be focused on how to keep the rate low. History shows that this is the most effective way to both raise revenue and promote economic growth. taxfoundation.org