Yglesias Digs In On Tax Breaks For Idle Rich

I recently took issue with a Matt Yglesias piece purporting to demonstrate the supposedly socially beneficial economics behind giving preferential treatment to investment income (or "capital gains").  Yglesias has now replied to the critics of that piece but remains thoroughly unpersuasive.  He completely ignores several major points of critique around the original piece (such as the point that the one doctor is not "doubly" taxed) and starts by simply trying to change the subject into the desirability of some kind of progressive sales tax, which I'll address later, but on his previous post, this is about all he has to say:

Last I'll say that I was a bit surprised by some of the blowback simply because this is such standard practice. Not only have capital gains been taxed at a lower rate than ordinary income throughout almost all of American history (with the gap even bigger when you consider that investment income isn't subject to Social Security tax), but the gap was particularly large during the postwar decades that progressives often cite as an example of a time when high tax rates were compatible with strong economic growth. In European countries with large welfare states, similarly, there's a lot of reliance on consumption taxes as a finance base.

This is really sloppy and fallacy laden argumentation, in order:

1. "Standard practice" - so lots of orthodox neoliberal economists think this way.  So what?  Shall I start of list of things that the neoliberal economic consensus was wrong about over the past 20 years? Maybe Yglesias is right that most economists agree with this, but it's not hard to find dissenters.  One of them is the most famous (living) economist on the planet after all.  He's not alone either.  Krugman's problem with this policy is what I highlighted from Yglesias' last piece; the wafer thin nature of the evidence of the actual benefits we're supposed to realize.  
2. "American history" - most of American history has US federal policy largely controlled by wealthy interests, sometimes actually driving, other times using their veto on policy they don't like via the Senate (which was the explicit point of the Senate).  The period between The New Deal to the end of LBJ's presidency is about the only period where liberal policies designed to benefit the majority were somewhat dominant.   Even so, America didn't get universal health care in this period like so many other rich countries, so even then the rich still had outsized political influence.  It's not shocking that they managed to keep their cherished tax break afloat.
3. "Postwar decades" - Let's concede for sake of argument that progressives all think the postwar decades were utopia.  Does that mean lower capital gains taxation is good?  Or that this period was good despite this tax preference?  Isn't that a more likely interpretation of progressive views on the subject?  

Now, as to a progressive consumption tax, this strikes me as beside the point.  Yglesias set out to show why Mitt Romney's tax rates should be lower than those of working people, and having failed to persuade his readers of that (at least judging by the comments and my own reaction) he diverts to saying that a progressive sales tax could alleviate progressive concerns about growing inequality.  Well, maybe.  But in an America funded by progressive consumption taxes, then we're also not taxing income either, so the preference for investment income over labour goes away.  When and if a progressive sales tax is on some kind of plausible agenda, I might be persuadable that it is superior to raising the capital gains tax, but that's not the world we live in today. 

Nobody on the left gets out of bed every day on raising the capital gains tax.  If Yglesias has some vision of America where the rich pay their share other ways, then probably I and others wouldn't care so much about this tax break mostly benefiting the idle rich, but inequality is growing, various forces are trying to use government revenue shortfalls as an excuse to cut the programs most important to the bottom half of society, and in the absence of a strong case for the general benefits of this tax break, it should be "on the table" too.  If an increase in the capital gains tax rate would keep some number of the poor able to get Medicaid or keep the Medicare eligibility age from increasing then damn right it should go up. 

Actually raising the capital gains tax rate is not on any likely-to-pass agenda, but at least let's not help the 1% plead their case by claiming it's better for everyone that the Mitt Romneys of the world pay lower taxes than us working shmoes.  The last thing we need is smug conservative pundits citing "even the liberal" Matt Yglesias as being in favour of this tax preference for the rich. 

CBC Posts a Funny April Fool's Joke: Flat Tax

Ha ha ha, good one CBC:

5 benefits of a flat-tax system, and why it still isn't likely in Canada

Graduated income tiers a disincentive to work, economist says

 I know you're laughing already, but wait, there's more:

For Niels Veldhuis, senior economist with the Fraser Institute, the argument for changing the tax system isn't about burdens but about productivity. He says a flat tax would increase the incentive for Canadians to work, earn more money and, in turn, invest that money back into the economy.

The current system of graduated rates takes a larger percentage of a person’s income the more money they make, and this is a disincentive for hard work, he says.

“You’re sending a signal to young, aggressive Canadians who want to take risks, who want to start businesses, who want to save and invest. And what you’re telling them is the more successful you become, the more and more we’re going to penalize you,” Veldhuis says.

See, Canada is chalk full of little John Galts, sitting idly in their own private Galt Gulches just waiting to unleash their productivity if only the big mean old government would stop punishing them for success (because Taxes aren't actually how we pay for civilization, no, they are actually a criminal penalty!) 

Now some silly people on the left will tell you that eliminating progressive taxation will starve government of revenue needed to maintain vital programs and services, but no, Mr. Fraser Economist will set you straight:

Unleashing that entrepreneurial spirit, so the argument goes, will create more investment, jobs and opportunities which will, in turn, increase government tax revenues.

See, cutting taxes will raise revenues!  Just like it did...well, Mr. Fraser doesn't say anywhere this has actually worked out, but the theory was proposed by a guy named Laffer so we know it's a great idea. 

Now I know we all want to rush out and tell our MPs to implement this fantastic idea on Canada, but we really should be prudent and check some references, just to cover our bases.  Tell us, where has this fantastic idea been tried?  It must be sweeping the world, because it all sounds so great!

A number of countries, including Russia, Czech Republic and Slovakia, have instituted single-rate systems over the past decade or so. 

I also hear that Ogdenville, North Haverbrook and Brockway love their new monorails.

For some actual worthwhile discussion on the radical flat tax experiments underway in various former Communist eastern eurpoean nations, see here, and here and here.  Quote from the last one:

The positive effects of the flat tax are at least ambiguous. There are no Laffer curve signals, a correlation proved between the fiscal relaxation through the flat tax and the increase in the budgetary revenues (Keen et al, 2006). Moreover, the budgetary revenues do not automatically get increased as a result of this measure. For example, in the case of Estonia, even under the terms of a high rate of economic growth, the share of the returns
from the direct taxes got decreased from 12% (in 1994) to 7.5% in 2008. Also, in the case of Slovakia, there have been made estimates that the revenues from the income
taxes and from the taxes on profit were up to 1% lower than under the terms of not introducing the tax reform (Odor, 2007).

You'll also learn that Flat Tax countries also find it necessary to institute hefty 20% VAT (sales taxes) and keep substantial payroll taxes to fund their minimal social safety nets.

Class Warfare Princelings

This is why the rich need high taxes; "Spankings lead to charges against businessman:"

Single mothers, former drug addicts and other beaten down young women who came to wealthy businessman Henry Allen Fitzsimmons for a chance to climb out of their financial hole knew his help came with a catch. In exchange for an allowance, a place to live and promise of a college education, they agreed to be spanked if they broke his rules.

At least six of the women say his corporal punishment went too far, including one who says he sexually assaulted her, and the 54-year-old Virginia Beach restaurant owner faces felony charges.

"These women are victims. They're single moms. They need their bills paid," prosecutor Tom Murphy said at a court hearing Thursday. "It's bizarre, there's no doubt."

Half of why society needs the rich to pay taxes proportionately to the benefits they draw from society (yes, progressive taxation is a fair deal for living some place that lets you become rich) is so that we can pay for the things that are needed to take care of the least among us, and provide the safety net for those in middle.  The other half is so that nonsense like this doesn't happen.  This sort of arrangement is an obvious consequence of inquality:  poor young single mothers struggling to survive in a society that no longer affords them nor their children any realistic hope of success meet wealthy sociopath with far too much money willing to spend some of it to exploit their much more basic and universal needs.

If Reagan could convince a generation of Americans that every welfare recipient was really milking the system to drive a cadillac and eat steak dinners on the town, perhaps some pushback along the theme of examples like this are in order, hence the title.  Rich people with money to spend on harems of impoverished women willing to put up with physical and emotional abuse in exchange for money can clearly afford higher taxes and clearly aren't creating the kinds of jobs anyone sane would want if they had any better alternatives.   Let conservatives and libertarians try to argue the rich do a better job than government spending the money in face of cases like this.