Rich Investors Make a Poor Case Against Biden’s Tax Plan

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With spring blooming, COVID cases falling, and the economy rebounding, many Americans are feeling optimistic about the future. Yet the “Biden boom” is not benefiting all equally. And as life returns to normal for the middle class, it’s important not to lose sight of those whose lives are still shadowed by economic trepidation — such as superrich capitalists who do not want to pay higher taxes on their unearned income.

© Tish Wells/Tribune News Service via Getty Images The rich must pay. Tish Wells/Tribune News Service via Getty Images

Last week, the White House leaked word of its plan to nearly double the capital-gains tax rate for investors who earn more than $1 million a year. At present, when such an American sells a long-held capital asset, they pay 20 percent on the profit, and if that asset is a stock, they pay 23.8 percent. If Joe Biden’s plan is enacted, America’s highest earners will pay a 39.6 percent rate on all capital gains, and a 43.4 percent rate on gains from financial assets. The administration expects this to generate substantial revenue, which it would invest in extending a monthly child allowance through 2025, making all community colleges in the U.S. tuition-free, expanding access to child care, establishing universal prekindergarten, and guaranteeing all American workers paid family and medical leave.

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News of Biden’s plan spread like a dark cloud over the towers of Billionaires’ Row. “Rich Americans Face Biden Tax Hike With Anger, Denial and Grief,” Bloomberg solemnly reported. For some, the sense of loss was personal. In 2020, Signum Global Advisors chairman Charles Myers had raised money for Biden’s campaign; last Thursday, as news of his candidate’s proposal started “blowing up his phone,” the crestfallen multimillionaire turned to the reporter beside him and lamented, “Over-taxing success is un-American.”

But don’t misunderstand Myers and his fellow brokenhearted megainvestors: They are not outraged for themselves; or at least, not exclusively. They’re also outraged for their country. As the billionaire venture capitalist Tim Draper warned last Thursday, the problem with Biden’s tax hike isn’t that it would reduce his personal income, but rather, that it will rob innovators of “the incentive to build long term #startups of value,” and thus, “spells death to job creation.”

As Myers and Draper’s remarks indicate, superrich critics of Biden’s plan are torn between two impulses: to condemn the policy on moral grounds (“punishing success is unfair and unAmerican”) and to criticize it on utilitarian ones (“raising our taxes will kill jobs and make everyone poorer”). The first option has the virtue of being unfalsifiable; no one can prove that God isn’t a college libertarian who idles away eternity by the pearly gates, smoking blunts and lecturing progressives about the “nonaggression principle” before condemning them to hell. Yet the moral argument is also politically inert. The idea of making people who earn more than $1 million pay higher taxes — on income that they generally did not work for — just does not strike the median American as unjust.

So the nation’s economic royalists have been forced to lean hard on “actually, the only way to achieve shared prosperity is to let private equity guys pay lower tax rates than school teachers.” Alas, this case is also unpersuasive, and for two reasons. First, most arguments for the public’s interest in low capital-gains taxes are weak, especially when one accounts for the public goods those taxes can fund. And second, self-pitying plutocrats’ few reasonable objections to the policy are easily resolved by tweaks that they also oppose — because their opposition is ultimately rooted in a bizarre and self-serving moral calculus, not coolheaded economic analysis.

Rich capitalists have a peculiar conception of economic “fairness.”

To illustrate these points, let’s examine the Wall Street Journal editorial board’s jeremiad against the Biden plan. In a column titled “The Dumbest Tax Increase,” the paper argues that the proposed capital-gains tax hike is proof “that ideology more than common sense is driving the Biden Presidency.” The wording of this thesis is curious. The complaint isn’t that Biden is putting ideology above evidence, but rather, above “common sense” — which is to say, the conventional wisdom among some (unspecified) social group, or, in other words, ideology. The editorial’s opening sentence is thus a declaration of intellectual chauvinism: Democrats’ default assumptions about how the world works are “ideology”; those of the WSJ editorial board are just “common sense.” This is an admirably faithful preview of the quality of argumentation that follows.

The Journal indicts the Biden plan on charges of both unfairness and economic illiteracy. On count one, the paper argues that justice requires a lower tax rate on capital income than labor income for three reasons:

• First, “under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible.”

• Second, “gains in asset values aren’t adjusted for inflation, so investors who hold assets for an extended period pay taxes on increases that are partly illusory.”

• And third, “a capital-gains tax is a second tax on corporate income. A neutral revenue code would tax all income only once.”

These points deftly illustrate the weakness of the “moral” case against high capital-gains taxes. Just as it tacitly equated its own ideology with “common sense,” so the Journal casts its peculiar conception of fairness as a self-evident truth, making no attempt to explain why it is wrong for income to be taxed more than once. Nor does the paper explain why the prospect of a multimillionaire investor seeing his unearned income eroded by inflation or nondeductible financial losses is so morally offensive that we are collectively obligated to tax such individuals at a special low rate.

The “fairness” argument is, ultimately, little more than an expression of unexamined class entitlement. The wealthy investor is presumed to have earned, on some metaphysical level, every dollar of pretax income he’s managed to accrue. For the government to tax that income twice — first, before he’s managed to collect his rightful share of corporate profits, and again, after he’s chosen to profitably reinvest that income instead of spending it on consumption — is unjust on its face.

This premise is liable to puzzle Americans who’ve spent little time in C-suites and/or 15 minutes reading Marx. One might muster some utilitarian argument against “double taxation” (e.g., that the tax code should encourage saving, so as to maximize productive investment). But here, we are specifically talking about the fairness of raising taxes on the tiny subset of savers who earn more than $1 million a year. From the standpoint of just deserts, it’s not obvious why such individuals should not have their income “triple taxed” or “quadruple taxed.” What precisely entitles capitalists to pay only one set of taxes on the money that their money makes for them? Does this entitlement still hold if their initial “savings” are derived from a family fortune, which itself derived from the uncompensated labor of enslaved people? Would taxing the income of such an investor to finance social programs that disproportionately benefit descendants of the enslaved be unfair? If so, why? What if the gains an investor accrued were made possible by workers in the developing world who labor under conditions that would be criminal in our own country? Would taxing such an investor’s income multiple times and using the consequent revenue to increase aid to the global poor be morally wrong? If so, why? One could pose similar questions endlessly. The point here is that the Journal makes no attempt to address or anticipate any of these objections. The injustice of “double taxation” requires no defense. After all, it isn’t ideology; it’s common sense!

A rising yacht does not necessarily lift all boats.

To be fair, the WSJ editorial board evinces a dim awareness of its vulnerability on the fairness question. Although it opens with the moral case against higher investment taxes, it later insists that the “most important reason to tax capital investment at low rates is to encourage saving and investment.” The more you tax capital investment, the less of it you get it, the paper insists. And less investment means lower “worker productivity,” and thus, “smaller income gains” for working people.

This argument is plausible on its face. But it is rooted more in plutocratic consensus than empirical evidence. Summarizing the relevant academic literature on capital-gains taxation, the nonpartisan Congressional Research Service reported in 2018, “Although evidence on the effect of tax cuts on savings rates and, thus, economic growth is difficult to obtain, most evidence does not indicate a large response of savings to an increase in the rate of return.”

Notably, this report was considering the impact of changes to the capital-gains rate for Americans with incomes in the mid-six figures and above. Biden sets his top capital-gains tax bracket at the historically high level of $1 million. The notion that higher capital gains taxes will radically reduce the savings rate among the richest 0.3 percent of Americans seems especially unlikely, given that such individuals face little trade-off between consumption and investment; they have more than enough money to make most any discretionary purchase, and most value preserving wealth for future generations over covering their apartments in gold (though there are of course exceptions to this rule).

Meanwhile, the correlation between low capital-gains tax rates and high economic growth is weak, as the Tax Policy Center illustrated in 2019:

Making it easier for poor kids to eat is good for the economy.

To be sure, we don’t have access to the counterfactual world in which capital-gains tax rates sat at 40 percent over the past four decades. It is theoretically possible that growth would have been lower under such a scenario. But even in the most generous assessment, the impact of low capital-gains tax rates on economic growth is unclear. What’s more, the actual policy being debated here is not what the capital-gains tax rate should be, but rather, whether it is worthwhile to raise the capital-gains rate in order to invest in universal prekindergarten, public child care, a child allowance, free community college, and paid family and medical leave. Even if the Journal proved that a higher capital-gains tax rate would have a negative macroeconomic impact in isolation, that would not establish that Biden’s overall policy would too.

It is true that one could finance Biden’s social investments with other taxes or, theoretically, with public debt. But the WSJ editorial board’s own position is that new spending requires new taxes. Yet it does not even acknowledge the argument that Biden’s proposed spending does more economic good than his tax hike does harm. It does not entertain the possibility that making it easier for mothers to take jobs, or high-school graduates to secure associate’s degrees, or parents to make ends meet through a monthly child allowance, or low-income kids to attend preschool is beneficial for the economy.

Yet the evidence for the macroeconomic benefits of these policies is at least as robust as the benefits of low capital-gains taxes. For example:

• A 2016 review of child care’s impact on the workforce estimated that a 10 percent decrease in child-care costs would increase labor-force participation among parents by between 0.25 and 1.25 percent. In other words, there’s reason to believe that expanding affordable child care would grow the workforce, and thus, the supply side of the economy.

Multiple studies have shown that attending a Head Start program dramatically improves the long-term health (and thus, later life productivity) of low-income children.

• A 2020 report from the Federal Trade Commission estimated that making community college tuition-free would increase enrollment by 26 percent and degree completions by 20 percent (thereby upgrading the nation’s “human capital”).

• A 2015 NBER study found that giving low-income families unconditional cash assistance made their children substantially more likely to hold full-time jobs as adults.

The Journal engages with none of this literature. Instead, it seeks to render such considerations irrelevant by arguing that raising capital-gains taxes wouldn’t actually raise revenue — and might even cost the government money. “Selling an asset is usually a discretionary decision, so investors can decide when to realize a gain or loss,” the paper explains. “As rates rise, Americans tend to hold on to their assets longer, reducing realizations.” Therefore, the Journal argues that Biden’s proposed 43.4 percent capital-gains tax is far above the revenue-maximizing rate, as it would compel investors to sit on their assets (presumably until Republicans regain power and restore economic justice).

This claim is disputed by some recent economic research. But the Journal nevertheless has a point: Capital gains are an unreliable (and unpredictable) revenue source for the government, since investors have discretion over when to cash out their holdings. This is not a difficult problem to solve, however, if one is actually interested in effectively taxing investment income: Instead of taxing the value that wealthy investors realize when they sell their financial assets, you could simply tax any increase in the value of the assets in their portfolios. This would enable Uncle Sam to generate revenue off rich speculators’ good fortunes, year in and year out, whether they sell their assets or not. Congressional Democrats are actively considering such a policy.

Of course, the fact that it is actually possible for the U.S. government to take large sums of money from rich financiers and spend it on social programs does not resolve the Journal’s concerns. Nor does the fact that such a transfer would plausibly increase labor-force participation and, thus, economic growth, because this is ultimately a debate about justice, not economics. I myself do not support giving monthly cash assistance to poor families because doing so might plausibly increase GDP; I support that policy because I believe it’s morally wrong for our government to let kids live in poverty.

A forthright version of the present debate over capital-gains taxes would center on one basic question: Do people who earn more than $1 million a year deserve a high rate of return more than poor children deserve day care and adequate nutrition? Unfortunately, we are going to have a disingenuous debate over the marginal impact of capital-gains rates on productivity instead — because even reactionary plutocrats know that their answer to that question is not “common sense.”

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