So far, the tax plans proposed by the Republican presidential candidates suffer from two big problems: 1) they cut revenues to the Treasury so aggressively that they’ll either force unrealistically large spending cuts or drive up deficits, and 2) they exacerbate our existing inequality problem by giving the biggest (by far) tax breaks to the richest households. (They may also suffer from a political problem in that, outside of their base, most voters don’t buy this trickle-down business — see Romney, Mitt — but let’s stick with the economics.)
This post focuses on problem No. 2: making the tax code more regressive. In this regard, Sen. Marco Rubio takes the cake. If you were thinking: “what tax change could I implement that would be most helpful to the wealthiest households?” you’d quickly come to the same conclusion as Rubio: zero out taxes on capital gains and dividends. That’s because taxation on these forms of income, currently taxed at a top rate of 23.8 percent, is highly concentrated: according to the Tax Policy Center, 79 percent of the tax take from this asset-based income comes from the top 1 percent, 5 percent from the bottom 90 percent.
Ever since this plan came out, my Center on Budget colleague and tax expert Chuck Marr has been bugging me about these unique data, produced by the IRS, on the 400 taxpayers with the highest adjusted gross income (AGI). Well, to get him off my back, I finally took a close look and … OMG!
The average amount of capital gains held by these wealthiest of taxpayers in 2012, the most recent year for these data, is $230 million. Just to be clear, that’s the average value of capital gains — the money these wealthy people make from selling appreciated assets — held by the richest 400 taxpayers in 2012. Multiply that by 400, and you get back the total taxable base for these folks: $92 billion. Actually, in the context of this discussion, I guess I should call it the existing tax base, since Rubio wants to take it off the tax table.
That $92 billion was 12 percent of total taxable cap gains in 2012. I repeat: 12 percent of all capital gains subject to taxation was held by the richest 400 taxpayers. You often hear about the top 1 percent in these discussions. Well, those folks comprise the top 0.0003 percent.
Why would you do this? Jeb Bush and Donald Trump both take the rate on cap gains and dividends down to 20 percent (the extra 3.8 percent helps to fund the Affordable Care Act, which they both whack); John Kasich goes down to 15 percent, Ted Cruz is at 10 percent. But zero? Really?
It’s the same old trickle-down rap. I’ve tried to do my part to shine some factual light on this fatuous claim, showing the absence of any correlation between the tax rate on gains and investment. I’ve quoted an actual investor by the name of Warren Buffett: “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”
Noted tax expert Len Burman, a guy known for keeping his thumb off the scale, writes:
“If low capital gains tax rates catalyzed economic growth, you’d expect to see a negative relationship [between the cap gains rate and growth] — high gains rates, low growth, and vice versa — but there is no apparent relationship between the two time series. The correlation is 0.12, the wrong sign and not statistically different from zero. I’ve tried lags up to five years and also looking at moving averages of the tax rates and growth. There is never a statistically significant relationship.”
Tax analyst Chye-Ching Huang has looked for the relationship and also come up dry:
“Not only is there no evidence that raising capital gains taxes reduces private saving, but because the revenues generated may be used to reduce deficits, the overall impact of a capital gains tax increase may be to increase national saving and investment.”
Yes, I know. Facts aren’t exactly the coins of this realm. And the fact that the top 0.0003 percent tend to finance these candidates should not be overlooked. They’re smart investors.
But it’s even worse — with Rubio’s tax plan, we may have entered a prevarication realm. If you follow this stuff, you may recall a dust-up in the last Republican debate wherein Rubio claimed that his tax plan delivers more money, at least in percent terms, to the poorest families. Obviously, they’re not getting a break from his capital gains tax cut, so how can it be that the Tax Foundation, when they score the distributional impacts of Rubio’s plan, do, in fact, get this result?
The reason is that the plan they score basically gives thousands to all of the poorest households, with no strings attached, regardless of whether they have any earnings. This is a negative income tax, or a “basic income,” as it’s called these days.
Poor Kevin Drum has practically blown a gasket trying to figure out what the heck’s going on here. He cites a Rubio spokesman implying that the Tax Foundation’s assumptions are wrong, and that “rules would be tailored to ensure that our reforms would not create payments for new, non-working filers,” which would of course be way more consistent with the brand. But the Rubio camp continues to be squishy on this point and seems to be citing the Tax Foundation anyway, so we don’t really know.
Either way, we can be certain that the Rubio plan will hemorrhage revenues while bequeathing a massive gift of wealth to the top 0.0003 percent. Apparently, he’s decided that America’s big economic challenge is that those rich people aren’t rich enough. And damn it, he’s gonna fix that!