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The Unpersuasive Case For Not Taxing Capital Income


Four points about Matt’s post defending taxing wage income at much higher rates than income derived from capital:

  • I’m confident that the assertion that there’s a consensus among economists that income derived from capital shouldn’t be taxed at all is erroneous.   (See, for example, this winner of the Nobel Prize in Economics, who pretty clearly seems to think that income from capital should be taxed.)
  • While I’m not open to the idea that Mitt Romney should be paying no or almost no taxes in most years, I could perhaps be persuaded that income from capital should be taxed at somewhat lower rates.   However, both principles of equity and free market principles place a heavy burden of proof on those arguing that wage income should be taxed more heavily.
  • I assume that the economics literature tells better stories, but obviously the just-so story presented here is so tendentious as to be self-refuting. Sure, if you 1)accept the premise that reducing or eliminating capital gains taxes will result in productive infrastructure investments rather than worthless accounting tricks, 2)ignore the economic benefits created by consumption, 3)assume that significant numbers of people will forgo money for doing nothing just because the profits will be taxed , and 4)ignore the fact that in most jurisdictions consumption is also “double taxed,” then reducing capital gains taxes looks good.   But since all of these assumptions are (to put it mildly) highly contestable, it’s just question-begging.
  • Particularly in light of Matt’s recent assumptions of pure self-interest on the part of teachers, it seems to me that we should consider the possibility that countries generally tax income from capital at lower rates not because policymakers have been persuaded by empirically dubious just-so stories and have arrived at the optimal policy outcome, but rather because the economic elites who disproportionately influence public policy (as well as many policy-makers themselves) gain massive immediate tangible benefits from the policy.
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