Debating Capital Gains Tax | Jared Walczak, Tax Foundation | Public Forum

0:00 discussing the capital gains tax but I think it is an interesting issue an important issue and I know that this is a debate topic for all of you so hopefully this will be enjoyable I’m going to say at the outset I have done four presentations today I don’t want to just talk I want to hear from you and I understand that the questions are by text that you’re going to be sending messages but I hope that you will do that throughout this so that we can make it something closer to a conversation and not merely a lecture I have not planned this as such I would like to have this be as interactive as possible but I do want to cover a number of things throughout this conversation tonight I want to talk about why capital gains taxes exist what the rationale for them was where they came from how they’ve changed over the years what the economic implications are you know what the implications for work and for investments are just walk through a number of the different provisions of capital gains taxation and try to give all of you a sense of how we got where we are how to think about capital gains taxes I’m not here to answer your question your question or your the base point resolved the United States should abolish the capital gains tax this is of course something that people have debated for a very long time really since the creation of the capital gains tax which goes back quite a long way in fact capital gains were taxed in 1913 when the individual income tax was created they have always been subject to that tax in varying ways over the years

1:30 but I hope to help inform your thinking on this and again to answer any questions that you might have to prepare you as best as possible so let’s talk a little at the start or leave pose the question and maybe let you think about it why do we tax capital gains income or maybe more broadly why do we tax income because you know there are a lot of different things that we can tax and as all of you I’m sure know until 1913 the United States generally did not tax individual income sure there was a brief experiment with this during the civil war there were a few other experiments here and there the Supreme Court didn’t think much of those until the sixteenth amendment is ratified but why do we tax it and should we be taxing it you know we often hear these debates about should we have income based tax issue we have consumption-based taxes and much of the rest of the world is more consumption oriented than we are which isn’t to say they don’t have income taxes but you look at say a lot of the OECD countries and they’ll be focused much more significantly on a VAT a value-added tax which is of course a form of consumption tax now what is the fundamental difference between an income and a consumption tax that might seem like a silly question obviously one is on your income one of them your sales but there’s perhaps a better way of looking at that what is income income is an aggregate measure income is both the amount of our current consumption and our savings and investment consumption is of course a portion it is a subset of the income tax or a income generally

3:03 rather and that’s important because simple truism whatever you tax you get less up so if we tax all income and we tax that investment portion and the savings portion rather than just a consumption portion we are in some ways skewing the economic behavior of individuals and you’re going to do it regardless you’re going to do it if you just tax consumption but when you think of the possibilities of what you can tax you can tax investment you can tax consumption you can tax property and ownership and some of these things are going to be more likely to change than others if you’re taxing investments or business activity you may get less of that if you tax consumption we may care less economically about getting less of that which is why you know traditionally we’ve often seen many especially on the right favored a more consumption oriented form of taxation this is also a reason why capital gains taxes have been particularly notable because of course this is very explicitly a tax that deals with investment we all understand that the capital gains tax is obviously on the returns on investment that it is the net of that that you can have gains and losses and they do offset we’ll get into more of the details of that later but this is absolutely your return on investment and here’s another aspect of this before we go take a step back and look at further tail we often talk about making sure that you want you tax every activity or every transaction only once whether that

4:33 the sales tax whether it’s any other form of tax you might want to tax all of the activity but you certainly don’t want to double or triple taxes so let’s think about what a capital gains tax looks like in context of the overall tax pipeline first of all of course there’s a business that is earning this income some corporation out there is engaging in economic activity and it’s subject to the corporate income tax so that’s one level attacks of course individuals are then purchasing equity stakes shares stocks in that company their income from which they purchased that has been subject to the individual income tax now once they obtain gains from their investment that is subject to the capital gains tax this is double taxation in some ways you can even argue as triple taxation and then of course you have dividends tax as well so if you went that route you’re also being taxed there and this incidentally is why if you’ve ever wondered why are there different rates on corporate income and pass-through income because pasture businesses think you’re S corporations your LLC is your partnerships go down the line these are tax through the individual income tax and this became a source of controversy in the recent tax reform debate well if we cut the corporate rate to 21 percent and small businesses could still be paying up to 37 percent aren’t they getting a raw deal and the answer is that corporate income is always tax twice it’s taxed first at the corporates or the entity

6:03 level and then secondly at the ownership level and then potentially three times because you do have all of these different layers of taxation and that’s why the capital gains tax is perhaps so unique and so harmful I’m gonna go backwards the first I do want to take a question that I have already asking that wouldn’t attacks on consumption slow down economic growth since people would be consuming less and businesses selling less and this is a very good question and obviously like I said any tax on any activity is going to have some impact on that activity so on consumption will have a marginal effect on consumption of course another thing that drives consumption is of course our after-tax income are essentially capacity to make purchases so this tax is already going to create greater after-tax income you could argue a very least this is balancing out but more importantly there’s the question of does consumption drive economic growth does investment drive the economic growth these are the supply-side versus a man’s side debates that have been going on for a very long time and perhaps somewhat curiously the Keynesian notions have generally been based on consumption which is why the prime the pump concept exists that during an economic downturn the government should be spending more they should be deficit spending to prime that pump to put more money into the economy into the hands of people who are consuming interestingly supply-side conservatism actually borrows many of the same idea the idea being that if you put more money into

7:34 the hands of consumers of individuals but they are going to buy more and that you know that you know this demand side it more than you know then the supply side is going to be which derived it and I think I misspoke earlier that’s like that many of these policies of the right in recent years have been demand side more than supply side even though you often hear the term supply-side economics generally speaking a tax on consumption is going to be far more neutral because it waits until the final transaction takes place rather than taxing at the point where the money could still be reinvested because the highest return on investment are rather the highest economic growth is always going to be associated with investment not consumption of course we earn to consume if we couldn’t consume we would not earn nonetheless clearly consumption does not grow the economy in the way that investment grows the economy it is the theological reason for investment rather than its source so let’s look a little a capital gains taxation more generally and please feel free to continue asking questions firstly it’s worth noting the United States is unique in the way it imposes capital gains taxes we’re among the highest in fact we have the sixth highest combined capital gains tax rate in the world at least of the developed nations 28.6% on average the combined state federal and local in some cases rates that is 10 percentages point 10 percent higher than the simple average in the developed world and it’s five percentage

9:05 points higher than the weighted average so we are a bit anomalous here nine industrialized countries actually don’t even have a capital gains tax and there was a time when that seemed very plausible you know just recently I found myself reading bill Buckley’s book God and man at Yale which somehow I had never read before because well perhaps I had an interest in God and man I didn’t have that interest in Yale but I took a look at it and one thing that he complains about he complains well what a collectivist society we are there were taxing capital gains and that his professors were in favor of it and honestly these days probably some of your most free market professors would just accept this as a given that of course you tax capital gains in the form of income maybe you want to make some adjustments because of the double taxation or some other reasons we’ll get into but certainly the window has shifted here when William F Buckley wrote his book this was still a heavily debated topic this resolution that you are debating was still something where he thought the majority might have been with him I’m not sure it is anymore so you have an uphill battle but there is this sense that you’re taxing something that has already been taxed multiple times capital gains taxes represent a biasing and saving because consumption doesn’t have as many levels of Taxation and was ultimately consumed of course any income that consumption taxes are being applied so if you tax capital gains be tax income and you tax consumption again multiple taxes on these savings itself and that bias is a

10:36 concern because less savings means less capital available in a future less economic growth under the federal code one of the issues here is that an increase in an asset price is determined as a nominal amount not adjusted for inflation and this is one of the big concerns with capital gains taxes generally you know you buy stock and it appreciates in value you see a 20 percent return on investment over five years well okay but on the other hand over those five years perhaps inflation wiped out five or six percent in real terms you earned maybe fifteen percent return but in nominal terms you earned a 20 percent return when you’re taxed the IRS doesn’t care about real terms they care about nominal terms so if you hold an investment long enough you are potentially losing significant value and sometimes this is very real in some instances the practice of taxing nominal gain has led to an infinite rate on real capital gains because all of the gains are due to inflation for instance if a taxpayer purchased a stock in 1999 or 2000 or even in 2007 again right before the you know the recession and then they sold that in 2013 they would be taxed entirely on inflation if they purchased the average stock or they purchased an index fund all of the games they would have experienced which would have been substantial would in fact have been inflation these are nominal gains on the order of 19 percent 12 percent 8 percent real gains of zero would they be

12:07 taxed on those rates so these high taxes on capital gains or distortion as they’re causing lower overall investment and higher consumption obviously outright repeal as you’re considering would be a pro-growth change it would decrease the cost of capital and increase the amount of capital available that of course has productivity effects that raises average wages it’s also costly for the government which is probably one reason why you’re not likely to see it if impractical a second option of course is inflation adjustment that at least addresses the first issue here of whether you’re taxing an actual gain or whether you’re only taxing a phantom gain that’s wiped out by inflation now you’ll often hear the argument that the reason we have these lower rates you know these preferential rates for capital gains is to address the inflationary issue what I would point out that it’s only a partial way of addressing them because again going to those examples 1999 2000 2007 by any of those times by an index fund cell in 2013 you have gains on paper you have no actual games so doesn’t matter how discounted the Rae maybe you’re being taxed on income you did not actually are now of course just structurally just the quick point of course capital gains are taxed at differential rates based on which income bracket you fall into we’ll go into those rates shortly the capital gains do receive this preferential rate capital losses offset those but if your losses exceeds your gains you can only

13:39 actually write-off three thousand dollars beyond your gains in a given year anything beyond that and you have to carry forward to future years this means the capital gains are subject to an immediate tax liability but capital losses don’t yield an immediate tax benefit that’s certainly a non neutral treatment we are giving more preference on one side of the ledger than the other let’s talk a little about the history because that was something that I was asked he I’d explain where these came from well the reality is that when in 1913 we first adopted an individual income tax pretty much everything was taxed he was a top marginal rate of 7% so a lot lower than we have now but all income was taxed as if it was ordinary income in 1921 that changed a bit the the revenue bill of 1921 created a new top rate of 12.5% on assets held at least two years and that was really important because a lot of happens between 1913 and 1921 there was of course a Great War and with a Great War came a great tax increase now technically the tax rate rose from 7 to 8 percent the top marginal rate no big deal right 7% 8% not really that big of a deal one thing important to mention the 65% tax surcharge rate so the actual rate was 73 percent in 1971 so when we first see a bifurcation of income ordinary income and capital gains income

15:09 this 12.5% rate is combined with bringing down that top marginal rates at 58 percent still sounds extraordinarily high to us today because of course we had seen 39.6 and recent years it’ll now go down to 37 it has gone down for this year to 37 at that point was being brought down big tax cuts at 58 percent and capital gains at 12.5% but you had to hold it for at least two years there was no preferential rate whatsoever if you didn’t do that then for a while we started looking at different way to address that question of inflation so there was a period for which you could take a deduction for 20% of the value if you had held the asset for at least one year 40% for two years 60% for five years 70% for ten very crude way of handling inflation but nonetheless trying to address that then in 42 you can exclude 50 percent of assets held at least six months or you can elect an alternative 25 percent rate either or not both the long-term capital gains rates face the 35 percent under the Tax Reform Act of 1969 thanks President Nixon he also created the AMT under that bill it wasn’t a great year for taxpayers and there was a 10 percent minimum tax on excluded games under Ford it increases further and the holding period changes so now it’s one year this is what we now think of long term capital gains are one year and that is something that emerged under President Ford in 76 then you get to a couple years later 78 the excluded game concept

16:42 disappears the the exclusion is increased to 60 percent and that yields an effective twenty eight percent rate even though it has a much higher nominal rate in 81 and a Reagan it goes 20 percent in 86 we start to get the modern form the 1986 tax reform act repeals the exclusion you no longer get to the doctor exclude a certain amount based on how long you’ve held it but we changed the rates now it’s 28% and that was actually in line with the new ordinary rates but then of course they diverged under Bush you know read my lips no new taxes and then new taxes we saw a minor increase we saw further increases under Clinton and then you see that divergence where capital gains are again taxed at a lower rate they stay at 28% the individual code goes higher Clinton then made some further changes to her lower rates for longer held assets and then we get the Bush tax cuts of 2001 and 2003 2001 egged red doesn’t really matter much here 2003 jag truck brings the long-term rates of 15% 5% for low-income individuals those that fall entirely within the bottom two brackets and then under the American Taxpayer Relief Act under President Obama which extended portions of the Bush tax cuts and eliminated other portions we see that new 20% rate for those in the highest income bracket 15 and 5 is still there and in 2013 an element of the Affordable Care Act kicks in a new tax on net

18:13 investment income of 3.8% so tack that on 23.8% is the most that you can be paying now so current treatments there is 0% for those in the 10 and 15% brackets 15 percent up to 35 percent bracket 20% for those in the top bracket and then some of those are getting the net investment income tax bringing it to twenty three point eight percent that is the short history which i think is somewhat relevant and I did want to go into that obviously has changed a lot but some things have held constant we have since the advent of the individual income tax in 1913 always tax capital gains we have not always done so as ordinary income in fact that has been the exception rather than a rule but we have taxed it I have a question here from Michaela so asking so which does the capital gains tax help the business is the government or the consumer well it certainly helps the government is an additional source of revenue I would argue in some ways it’s a double tax reliefs portions of it or a double tax so the capital gains tax of course is making it more costly to invest in a business if I’m an investor and I’m choosing to lend capital to a business in the form of purchasing stock my return on investment is lower because of the capital gains tax so the yield I need from a business is going to be higher and the the income I have to dedicate to that the capital I have is going to be lower these are both constraints on business there are constraints on me obviously because I’m

19:43 going to receive less of a return I’m going to pay more I may not care for that it’s a constraint on the business because their availability of capital is limited at least on the equity side they may in that turn to debt financing and of course their their stock values are lower and their capitalization is lower because there is this cost because markets correct for all these things right you know if if the return is lower because of taxation then the valuation is going to be lower as well so both businesses and individual investors are certainly losing from this provision obviously baby better off if it was lower or non-existent after the consumer there’s a price effect now we all know I hope we all know that that prices are not based on input costs however there is a point at which you cannot produce and if all of the producers have similar constraints on them this has an effect obviously if there’s no one demanding a product at a given price it doesn’t matter how much it costs to produce basic price Theory but this tax is falling on everyone it does filter through to our entire economy so you see costs throughout the economy but certainly it is reducing the capital available to businesses and one thing we know is that capital investment is what drives economic growth you look right now at so many companies that are sitting on a lot of assets you may read this in the news you look at companies that are sitting on billions of dollars

21:14 and you have why aren’t they investing why are they holding on to it and the answer is there’s not an investment out there worth their while that has a significant chance and had a high enough yield based on current policy if the tax costs come down more investments are suddenly viable so this is very relevant for a lot of companies on the government side this is a good segue governments of course appreciate the additional revenue but we should note that that revenue can be extremely volatile going to pull something here so I apologize that I’m looking away but capital gains realizations can change very dramatically I’m going to try an experiment and hold something up to a camera we will see if this works I don’t know if all of you can see that but that is US capital gains realizations in billions of dollars for a number of years that include the Great Recession and you can see I hope some very dramatic spikes and some very dramatic changes in fact in the principal year of the Great Recession in New York we have some great specifics from Newark New York capital gains or realizations slipped by 71% so of course this meant that revenue fell dramatically and the state had been relying on that and suddenly was gone because capital gains are going to be probably some of the most volatile sources of state or federal revenue that you can find people change their decisions on when to cash out when to take a gain based on economic conditions

22:45 and of course in many years there just aren’t games you had years where people were taking significant losses they were taking a bath in the market and they may have actually taken those losses on their forms and there was nothing there in fact the states and the federal government were providing tax benefits there was you can take up to that $3,000 in losses so as a source of income it is a highly volatile revenue stream states have looked at this on a standalone basis Washington State for the last few years which does not have an individual income tax has talked about creating it just a standalone capital gains income tax now there are a lot of reasons why that’s probably not a great idea but the biggest issue for them has been if they were going to use that as a source of revenue for say education which was proposed well they could have swings of 30 40 50 percent a year it’s really hard to fund any sort of government program on a continuing basis with swings like that another question from rap what percentage of federal revenue is applied by capital gains taxes is it a significant source of income and you know you’d think I would have that number right in front of me and I don’t have that number directly in front of me it’s not insignificant rap I will try to come up with a number on that before the end of this webinar but it is not a major driver of the tax code you know we’ve seen you know changes in capital gains taxes in the past it has not been significant in fact there is some evidence that high capital gains tax rates actually lose money

24:17 for the federal treasury now you’ve probably heard this a lot and I want to always caution when I say something like that because you’ve all heard about the claims the tax cuts pay for themselves and the answer is that usually they don’t that’s not an argument against tax cuts but it is an argument for some realism you’ve probably heard of the Laffer curve and the reality is that on the vast majority of taxes we are on the left of the Laffer curve we’re raising taxes would raise revenues now it could still cost us a lot we could see significant loss of economic growth but not to the point where we would actually see lower tax revenue with a higher tax rate this is one of those areas where at very least it is a close call there is some historic evidence that when we have cut capital gains taxes we have actually spurred enough investment that we have seen greater economic growth to the point that we’re actually collecting more in revenue I would suggest that if we’re not on the other side of the Laffer curve we’re at least close enough that this is a prime candidate for reduction if we’re looking at ways to grow our economy the returns here are extremely high compared to other things you can do in a tax code someone asked me to spell the name of that curve it’s laugher named after art Laffer la FF ER and it is a valuable device to understand but also comes with cautions the basic idea of the Laffer curve for those of you who are not familiar with it is that there is an income maximizing point or a revenue maximizing point for the

25:47 government and it’s not at the highest rate I imagine for instance do we take a product let’s say well soda taxes are coming into vogue right now and you let’s say that we set a 1 cent per ounce soda tax rate now obviously it’s going to reduce our consumption but currently the government was raising nothing so now they’re raising a cent per ounce even if it reduces consumption well you’re still going to be raising additional revenue now you raise it to 2 cents per ounce if you cut consumption in half or more you’d actually be losing now you probably aren’t you’re probably going to cut it by a significant amount by not by half so 2 cents per ounce probably still is a revenue maximizing move might be bad policy revenue maximizing what have you created it at 10 Browns what if you were saying that you know when you go get that you know 20 ounce soda that you’re paying two dollars in taxes well now you probably have such a strong effect that you might be raising less money than you were at two cents an ounce so you’re on the other side of the Laffer curve you have not only created potentially campus Kotori taxes but you’ve actually reduced the revenue that can come in to a federal or state or local tilt so that’s the basic idea of a lapper curb the problem with the lab recur as many have internalized this to say that we can always cut taxes and raise revenues usually not true because usually we’re somewhere to the left of the Laffer curve the US compared to the rest of the world is not a particularly high tax jurisdiction now this is not a political statement this is not to say that we have the appropriate level of Taxation

27:18 this is that that is something that can only be answered by individuals deciding what government should do and then deciding how it should be paid for but we are almost certainly not on our major taxes to the right of that revenue maximization curve but we’re really close I think on capital gains taxes and that’s an important thing to consider that we may have set this rate so high that we are really hampering the economy we’re hampering investment and we’re relying on this volatile revenue source that isn’t really raising all that much I think all of these things are concerns let’s talk a little more about what the optimal design of a tax code is because I think that can help you put this all into context so this is general but again the capital gains taxes fit into this taxes are ideally to raise revenue not to guide economic activity not to guide decisions the more you do that the more you’re creating distortions in the economy of course I think we all probably on this call believe in a market economy and a market economy should be guided by those principles not by the government there’s no way the government can avoid that entirely when they are imposing taxes but we want neutral taxes we don’t want the government picking winners and losers we don’t want distortion of taxes we don’t want taxes following multiple times so think of a classic example sales tax versus called a gross receipts tax a sales tax ideally applies one time at the end at the final transaction you buy a good or

28:49 service for your use and you pay a sales tax a gross receipts tax applies at every stage of the production process over and over again and it’s embedded multiple times in that process the prod product so you might have one product that has a really short production process and it’s fine it’s taxed one time maybe twice you have other products that might be taxed five or six or seven times that’s highly non-neutral we want to avoid that sort of double taxation another thing we do to avoid double taxation yeah you look at state income taxes imagine you’re a company that works in multiple states let’s say that you work in Virginia Pennsylvania and Illinois now you do some work in Illinois and you pay a loan on taxes but you’re based in Virginia and you do some work in Pennsylvania you pay Pennsylvania taxes but you’re based in Virginia well now what do you pay Virginia taxes on that – the answer is actually yes initially you pay for jigna taxes – but then you pay take a credit for the taxes paid to other jurisdictions to reduce your Virginia liability because we want to avoid double taxation we want to avoid a boat because we think this is generally wrong but also because it’s distortion it’s some activity is penalized compared to others and that’s what we’re doing with capital gains taxes because this decision of individuals and businesses because businesses are involved in this investment as well in through other companies to invest in some sort of yeah yes to take some investment opportunity try to get a return their potential return is being reduced it might even be

30:19 made negative this is affecting investment decisions businesses and their income are being taxed at multiple layers again at the entity level as the ownership level at the capital gains and dividends distribution level and this is changing economic activity this should be a concern for us this optimal taxes aren’t tax aren’t imposed at intermediate levels they’re taxed one time on one set of assets or one set of income income taxes as we mentioned our changes in income taxes are changes investment value they’re only realize they’re only tax one realized so when you look at a capital gain you know you’re obviously only being taxed when you sell the asset that’s a good thing because otherwise you be paying on potentially expand some gains the downside though is that we are treating gains and losses differently that is creating some non neutrality again it is hurting the decision-making of individuals when they participate in the market you know consumption taxes as mentioned debates they affect different things so incorporate a corporate tax or any tax on business is affecting labor it is affecting investment is taxing consumption a consumption tax is only hitting one of those if you double tax this you are potentially creating a situation where all of the possible sectors of the economy are being taxed multiple times this is probably one of

31:50 the most anti-growth things you can be doing I’ve got a question here but shouldn’t the fat cats you get the big capital gains get to pay more taxes to help support those in society who for one reason or other are poor disabled disadvantaged etc and you know this is a very legitimate question and it goes to the broader question of progressive systems of muddling taxation but of transfers because we have both of those you know we have a social safety net we have a welfare system and we have progressive systems on both sides and listen there are great arguments for these things the question in my mind the question I want you to ask yourself is how do we maximize as many of the values we want because we can raise the same amount of revenue in a lot of different ways it matters how we do so it matters whether we are promoting economic growth while we do so or whether we are hindering it we are clearly going to in this country have progressive taxes and we are going to have a progressive distribution through entitlement spending and social programs and various welfare programs and we can have all of those things and if you want the tax high income individuals more there are ways to do that without hindering invest as much capital gains taxes are going to be worse than individual income taxes and consumption taxes are being better than both of these and you think okay well but how is that going to hit the higher income individuals well two

33:22 things one at the federal level we could have a VAT and a VAT would be capturing a lot of economic activity that’s not being captured under sales taxes right now and could shift much more towards some of those high income purchases and at the state level you see the same thing think about what’s in your sales tax base most of the goods you buy are in the sales tax very few of the services you buy are in the sales tax and think about who is consuming services versus who is consuming goods now part of the reality is we’re all consuming services we are a 2/3 service oriented economy these days and that’s a complete flip from 50 years ago when it was 2/3 goods oriented but higher income individuals are buying and you know utilizing a lot more services whether it is things like landscaping all the way to legal services accounting services all manner of professional services these are high income and we’re generally keeping those out of the tax code so if someone has a concern that the tax code is not progressive enough or that the entire system is not properly distributing income but these are the these are separate questions and capital gains taxes what I would ask you to bear in mind is that there are better and worse ways to raise a dollar of revenue and we may have all of these goals in terms of how we benefit or you know try to assist low income individuals we should also think of how we raise that revenue and whether it is in a way that gets out of the way of the market enough to allow a significant pro-growth policy or whether it is double and triple taxing certain types of income another question is is there a lot of corruption with how capital gains and

34:53 losses are reported and that’s a really good question too which I don’t know if I can give a definitive answer but I would say probably very little in part because there’s reporting on almost all of this we have a Securities and Exchange Commission and there are requirements that any sort of listed corporation that issues stock has to provide the SEC and the IRS with information about stock sales and dividends and interest and you know all of the information that goes into your form you know if you use any sort of brokerage service if you have any personal investments and you use a brokerage service you probably receive a form at the end of the year that tells you pretty much what you owe and everything you need to put on your form well you’re not the only one that got that the IRS did too so if you diverge sharply from that the IRS may well take notice there could be an audit now they don’t have the resources to audit any every one but this is actually an area just like with wage income where they have the documentation they have your w-2s for wage income they have your forms on your you know your investment income there might be some that’s not included on that but for the most part they would be able to catch a large divergence so one wouldn’t expect that there would be a significant amount of underreporting or corruption or yeah illicit tax avoidance in this particular realm what you would expect is a lot of tax planning because

36:25 capital gains especially the big capital gains that governments really want to get their hands on Austin are in the hands of high-income individuals who have good financial planners who have often very good financial sense and they will be trying to maximize their own gains and minimize their own tax liability we’re talking about legal tax avoidance and reduction the tax incidence but higher income individuals have more ability to make economic decisions that limit their tax liability than do low and middle class individuals so when you attacks like this you’re going to see more legal tax avoidance or at least uh delays on taxation you might note of course that ideally a tax code doesn’t provide these opportunities the more neutral attacks code is the fewer winners and losers at picks the more that it just has one system that works for everyone the harder a lot of these tax games are I do have any other questions I can talk about other things but you want to see if there are any other questions before we go on on the you know where capital gains stand I will leave the questions open for now and anyone else please feel to jump in but broadly speaking as you try to determine should capital gains be taxed remember of course they always happen remember that this would be a very significant change in tax policy and one that probably has significant political ramifications because as was noted in some of the last questions this

37:56 is a tax that perceived as being on high-income individuals note that provides on the caveat though that the vast majority of us have some sort of investments even if we’re not trading you know stocks you know maybe we don’t have a personal brokerage account maybe we don’t have our own financial planner we have 401ks we’re in pension plans you know capital gains affect all of us and you know obviously the a lot of their some tax advantage plans so you know the 401k off to a certain amount you have these tax advantages but these exist because capital gains hit all of us and you might think well okay well I only have 401 K and I’m not affected because you know I’m only paying on one side maybe I’ve got a Roth IRA maybe I’ve got you know a 401 K tax advantage well okay but the company is earning less because of the higher cost of investment and that’s why this affects all of us you know we have to think of the economy as this interconnected whole it’s not just the investor it’s also the business and its ability to have investment opportunities that are profitable the yield there and again it’s flows through to prices as well this is one of the taxes that we probably see some of the more adverse effects there are more fundamental philosophical questions on what sort of income we should be taxing of course wage income is the most prominent category and we could ask lots of questions about why we choose to tax income I think the realistic answer is because it’s readily available it’s

39:26 easily reportable and governments need revenue and they probably don’t have much more philosophical justification than that but governments have sometimes justified income taxes on the fact that they enable certain economic activity that they provide the markets in different ways and one can agree or disagree with that but obviously governments do regulate business so you have an income tax on your wage income government regulated markets in different ways as well should you have a tax on capital gains is that different than wage income a question you need to wrestle with at very least I think it’s different for two reasons one the level of double taxation 2 the inflation issue some might argue that it is different in a more fundamental way that one has already earned this income through one’s wages and if one finds a way to have it appreciate and do so by investing back in the economy that maybe that shouldn’t be a taxable event of course on the business side generally speaking it wouldn’t be on the individual side it is so again that dichotomy is there you know something certainly to think about but broadly speaking as you’re thinking about these questions as you’re trying to handle how you will debate this issue I would encourage you to look at the economic literature look at the effects on investments that are associated with business taxes versus individual taxes versus consumption taxes look at the level of double taxation try to assess just how many times a particular dollar of investment might be taxed by the time

40:58 it actually reaches someone and try to decide what your theory of taxation is and how what is legitimately taxed what shouldn’t be taxed now I’m not offering you a theory on this I’m not sure that there is a whole lot of a difference between income in the ordinary sense and capital gains income from a philosophical sense but there are those who believe there is but there’s certainly a difference on again the double taxation argument the you know the interest you know or the the inflation argument I see someone else typing I’ve you really probably covered most of what I have but I do want to answer further questions so if anyone has further questions please go ahead and type those in now and we’ll try to get to anything we have before the end of this call yeah ask hearing a lot of reasons why capital gains taxes are a bad idea total taxation the impacts different it can associate on the classes differently inflation arguments because you sum up the biggest reasons to the and a capital gains tax that’s an excellent question because yes perhaps I’ve been you know more on the negative side which isn’t to say I think that we should repeal them but I certainly think that we should be very concerned about those rights the arguments in favor would probably mainly be distributional arguments they would be questions of income inequality so you would just again have this question this is a type of income and type of activity that is disproportionately engaged in by higher

42:28 income individuals now many of us most of us invest but when we think about the overall share of investment it’s going to be fairly high income the you know other arguments for a capital gains tax some of them simply come down to this is income and why wouldn’t it be taxed you know you can do a lot of things with your income but if you are able to obtain additional income whether it is by your labor or by your investment choices you know there’s a question why shouldn’t it be taxed and I think that’s actually a perfectly valid argument but again the fact that it is already being taxed at multiple levels at the corporate level already for you at the individual level before you invested makes that perhaps less of a compelling argument it’s not so much should it be taxed but how many times it should be taxed do we have further questions on this call because I think we’re going to wrap up a little earlier I don’t think there’s anything wrong with that but want to make sure that we have an opportunity for everyone to get their questions in all right well you know Maddie if it’s all right with you we may leave it there I appreciate all the questions we got and hope that helps at least inform some of the further research all of you will be doing so thanks for having me oh it looks like there might be one more question all right I’ll just give that

44:08 one moment I know that we’re in this yeah I get to speak you all have to type a little bit of an inequity in there but we’ll provide a moment for someone to ask one more question I would also say that you know I work for the Tax Foundation I’m not speaking for the Tax Foundation today but we do have a lot of resources on our website about capital gains taxation some good paper you missed may wish to reach that Tax Foundation or just a plug for our group but you may find some resources that are helpful to you and also some data tables that may be useful as you review this and you know form your arguments all right one final question are there specific historic times in American history when capital gains taxes have been exceptionally influential in impacting the economy that I know of that is a really good question and one I might have to think about a little longer but I would suggest that that period between 1913 and 1921 there was a good reason for why we saw that shift because originally individual income taxes fell and very few people top rate of 7% but the real issue was that only a few percent of Americans were paying income taxes and very few people had reportable capital gains this was not an era where many people were actually investing in a stock market we started to see more people investing in the subsequent years of course we actually

45:39 had a stock boom for a while and words can help this in the store chair by probably heard all the long-term arguments broken windows ideas why this isn’t really long-term economic benefit but GDP can increase during war so we saw some of that during the World War one but taxes are rising really fast and again you get a 73% top marginal income tax rate by 1921 now 73% on capital gains is just untenable because you already now have corporate taxation this has come into existence as well by this point excuse me chief corporate taxation you have individual income taxes capital gains taxes you’re getting really close to taxing 100 percent there’s almost no reason to be engaging in economic activity in this way no reason to invest and I have to think that that drove a lot of the decisions to radically ratchet that rate down so when in 1921 the Congress cut the top rate to 58% they didn’t keep capital gains taxes there they brought them all the way down to 12.5% I have a thing they recognize that differential and clearly in a few years they also recognize the inflation argument by using those different you know there’s different deductions to try to address that so pretty early in the history of capital gains taxes the limitations were realized addressing them has always been difficult but these limitations have been recognized at least since the late

47:10 1910s and if that’s it Mattia thank you for having me yeah thank you so much for taking the time out of your day to talk to us about the capital gains tax I know this was very helpful um now everyone I am going to send over my email um please feel free to email me if you have any further questions or if you would like um links to more resources I’m more than happy to provide that for you guys also this this recording is going to be posted on YouTube sometime within the next 48 hours hopefully sometime tomorrow but that’s just about everything that I’ve had I have guys now I’m going to go ahead and shut down this meeting room it’s going to direct you to are we the students essay contest please look at that if you have not yet you have the chance to come to DC and get a scholarship to constitutional Academy as well as on your chance at $5,000 so it’s worth a try so I’m gonna go ahead and direct you guys there and I hope you guys have a wonderful night and like I said feel free to email me if you have any questions Thank You Jared