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Friday, October 21, 2016

Where Does $2 Trillion In Subsidies For The Wealthiest Hide In Plain Sight? Capital Gains Tax Breaks

Where Does $2 Trillion In Subsidies For The Wealthiest Hide In Plain Sight? Capital Gains Tax Breaks

Research shows that government subsidies for the 1 percent are creating greater inequality. A new white paper by Roosevelt Institute Chief Economist Joseph Stiglitz offers solutions.

“What’s the effective rate I’ve been paying? It’s probably closer to the 15 percent rate than anything.” Mitt Romney made national news with that statement during the 2012 presidential election, since it meant he paid a lower effective tax rate than many middle-class Americans. The simple reason for his low tax bill?  The tax code’s special treatment of investment income.

In a recent report published by the Center for American Progress, I examine how government subsidies for investment income are making economic inequality worse. The merits of subsidizing investment income are particularly questionable in light of new research published by renowned French economist Thomas Piketty in Capital in the Twenty-First Century. Piketty finds that economic inequality has increased dramatically in recent decades, and will get even worse as the rate of return on capital from investments largely owned by the wealthy exceeds the overall growth rate of the economy.

Nobel-winning economist Joseph Stiglitz, Chief Economist at the Roosevelt Institute, takes a hard look at subsidies for investment income in a new white paper on tax reform. Stiglitz advocates taxing capital gains and dividends at the same rates as ordinary income. Under current law, the federal government will deliver an estimated $1.34 trillion in subsidies to investors over the next 10 years in the form of reduced tax rates for capital gains and dividends—68 percent of that money will go to the top 1 percent. Stiglitz argues that there is “no justification for taxing those who work hard to earn a living at a higher rate than those who derive their income from speculation.”

Stiglitz would also eliminate an expensive, but little-known, provision called “step-up in basis,” which subsidizes inherited wealth. By taking a step-up in basis, heirs selling inherited assets only have to pay taxes on the capital gain that took place since they received the asset – gains that accrued during the previous owner’s lifetime are never subject to income taxes. This tax break will cost about $644 billion over 10 years, with 21 percent of that subsidy going to the top 1 percent. For the wealthiest families, the benefits are staggering: 55 percent of the wealth in estates worth over $100 million is in the form of unrealized capital gains, meaning that these families will never pay income taxes on the majority of their earnings since the heirs will benefit from step-up in basis.

Defenders of tax breaks for investment income argue that these subsidies encourage savings and grow the economy, but over the past 60 years there has been no obvious relationship between economic growth and the top capital gains tax rate. Our economic problems are rooted in a lack of aggregate demand, but tax subsidies for investment income reduce demand even further for two reasons. First, they encourage investors to hold on to their wealth and consume less. Second, these subsidies increase economic inequality by primarily benefiting the rich, who tend to consume a much smaller share of their income than poor or middle-class individuals.

The assumption underlying subsidies for investment income is that wealthy investors are “job creators,” but Stiglitz points out that “much of the income of the top arises from rent seeking (wealth appropriation) – and thus impedes growth and efficiency.” Stiglitz is using the term “rent seeking” in a broad sense to mean income from ownership, monopolies, or special treatment from the government. Rent seeking does not grow the economy; it only redistributes wealth from within the economy to rent seekers. For example, landowners get their income from rents paid by tenants. Stiglitz points out that land is an ideal target for taxation, since taxes cannot possibly reduce the supply of land. Yet the United States is taking the opposite approach by allowing landowners to fully benefit from step-up in basis and reduced tax rates for capital gains.

Tax breaks for investment income are massive in scope, but often overlooked in discussions about the proper size and role of the federal government. These subsidies are part of what Suzanne Mettler calls the “submerged state,” government programs that deliver benefits indirectly, with recipients often not even recognizing that they are benefitting from public assistance.

But government programs administered through the tax code are still government programs. It makes no meaningful difference to the government or to beneficiaries whether a subsidy is delivered in the form of a check from the government, or as a reduction in taxes the beneficiary would otherwise owe (which often takes the form of a higher tax refund check from the government). The nonpartisan Joint Committee on Taxation explains that tax breaks “are similar to direct spending programs that function as entitlements to those who meet the established statutory criteria.”

The reaction Mitt Romney’s comments may be the best example of just how invisible government subsidies for investment income are for most Americans. Watching Romney deliver the full statement and explain that most of his income comes from investments, it was clear that he did not think he was making news. And he was right – Romney’s statement that day should not have been news. We already knew that he made most of his money from earlier investments, and the tax rate at the time on capital gains and dividends was 15 percent. The only reason Romney’s statement made headlines was that most Americans were either unaware of preferential tax rates for investment income, or did not realize the staggering benefits this subsidy delivers to extremely wealthy individuals.

It is no coincidence that government subsidies for investment income are delivered through the submerged state. These programs are not popular when the American people can clearly see their impact, and they add to the sense that the economic game is rigged for those at the top.

Harry Stein is the Associate Director for Fiscal Policy at the Center for American Progress. Follow him on Twitter @HarrySteinDC.

Cross-posted from the Roosevelt Institute’s Next New Deal blog.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: Gage Skidmore via Flickr

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  • Daniel Jones

    There is a sense that the game is rigged simply because it has been.

    What do you think you live in, a democracy? You live in a plutocracy hiding behind democracy.

    • CPAinNewYork

      Right on!

  • TZToronto

    One benefit of changing the rules would be that more people would be able to accumulate wealth (moderate wealth, not extreme wealth) and begin to realize the American Dream. Another result of this re-invigoration of the middle class would be that the super rich would benefit from a much stronger economy that would, in part, replace in some of the real income what they lose in capital gains deductions. The problem with this is that none of the super-rich want to test this idea. It’s like “Indiana Jones and the Last Crusade” where he has to make the leap of faith from the lion’s mouth. Unlike Indiana Jones, the super rich don’t have the required level of faith. On the other hand, the rest of us have lost faith that the “job creators” have any intention of creating jobs with their ever-increasing wealth.

    • CPAinNewYork

      The rich don’t want us to accumulate more wealth. The rich hate and fear the middle class.

    • Mark Forsyth

      Clearly the wealthy do not create jobs because they sit on the wealth that would be required to do so.That’s bad enough but then we have republicans who oppose any government jobs plans.It’s plain to see that the American Workers are the ones who drive the economy by spending money.It is past time for working folks to have a bigger slice of pie.There will be hell to pay if they don’t get it.

    • kenyattagward

      Peyton . true that Jessica `s blurb is shocking, last
      monday I got a gorgeous Peugeot 205 GTi after having earned $6860 this past 4
      weeks an would you believe ten-k this past-month . with-out a doubt this is the
      easiest-job I’ve ever had . I actually started six months/ago and pretty much
      immediately started to bring in minimum $84… p/h . Read More Here C­a­s­h­f­i­g­.­C­O­M­

  • kathrynddaniels

    before I looked at the check of $8543 , I accept
    …that…my neighbour woz like they say truley earning money parttime on their
    apple labtop. . there sisters neighbour has done this 4 only 19 months and by
    now cleared the debts on their house and bourt a gorgeous Ford . visit this
    site C­a­s­h­d­u­t­i­e­s­.­C­O­M­

  • CPAinNewYork

    Great article, Mr. Stein.

  • ExRadioGuy15

    I’ve been saying/writing for nearly three years that these Bush 43 tax policies need to be repealed…the capital gains tax cut is one of thousands of them that allow the wealthy and big corporations to reduce their “adjusted gross income” (the amount actually taxed) to as low as possible or even zero. On top of that, corporations get “subsidies” (welfare) These policies, in adherence to the seditious “Starve the Beast” GOP financial philosophy, cost us $1.5 TRILLION a year in lost federal tax revenue. The Bush 43 tax policies were sold to us as “job creation” tools. What they really were and still are: upward wealth redistribution tools. No wonder more than 95% of the wealthiest people in this country vote Republican….

  • Independent1

    Below is the link to another article which substantiates what Mr. Stein is saying. In the article brought up by the link, DailyKos member ‘kavips’ points out that it’s only been times when tax rates are high, that the American economy has actually prospered. And that’s because, as Mr. Stein points out too, the wealthy are risk averse, so when tax rates are low, the wealthy, including corporations, generally choose to leave their monies in investments, including off shore, rather than starting or expanding businesses, due to the lower risk (they’re making plenty of money from their investments, so why take the risk of adding employees to an existing business or starting a new one).

    Here’s a brief excerpt from kavips article:

    Ironically as we gave our businesses more and more money with lower taxes, less regulation, tax funded price supports, hand-tied their unions, and made free new technology at our taxpayers expense, despite all these perks and incentives, they invested less. So what are they doing with their money? Pick up any financial publication and read the headlines. They all will let you know.

    Rather than invest in plants and equipment, businesses are primarily using their funds to repurchase their own stocks in order to boost management earnings and ward off hostile take-overs, pay dividends to stockholders, and accumulate large cash and bond holdings.

    None of which help our economy. It is as if we work hard, buy their products, and they put that money into a mattress. Soon, we are going to run out of money. Fortunately the Fed has filled the gap by printing more and giving it to banks for free. It too, filters though the system, and when it gets to the top, it goes into the mattress.

    Economic Stagpression: Two Charts The Entire World Must See

  • charles king

    Whatever happen to Vernon Howard’s ” I believe you have succeeded in life When all you really Want is only What you really need”. Who? are these Capitalistic Pigs, Plutocracts Who? harbor the Peoples tax dollars and then has the gull to privatize the People’s ASSETS. I do not think these people should be allow to exist. Wake up America because these Corporations are not doing what they were developed to do for the country. We the people has to do some Critical Thinking and solve this problem in our system Which? is Democracy but you have to work at keping your Democracy Alive. The VOTE still belong to the People and We know Who? these pieces of S**** are so next time V O T E their sorry A**** OUT OUT OUT the VOTE is stil Supreme, so get rid of these T***** and bring back your Democracy, Your Unions, J A Z Z, public Schools, Social Security works, Obamacare works, Medic Care works, welfare for the poor works, America is for ALL not just Some. Thank You are the magic words in my book. Love Ya All. Mr. C. E. KING

  • Tony Torres

    Unfortunately all we do is blab on and on but nothing EVER get done. When are we,the 99%, are going to do something? What is the line that the1% has to cross (witch they have already, in my opinion) for realistic tax laws are implemented? So until we start trying to change things,all our bitching is just that,nothing but hot air.

    • Faraday_Cat

      The problem, as I see it personally, is that even the Republicans who recognize that their representative is keeping the status quo to benefit themselves or rich donors flush with cash will still vote for them because the other guy (usually a Democrat) doesn’t share thier “values” (guns, god, abortion). Republicans have figured this out, and simply bleat “PRO LIFE” or similar right before or after voting for tax breaks that only benefit the 1%.

    • omgamike

      When that line is crossed, people will take to the streets. Exercising their right to vote is no longer working. If changes to help the middle class and the working poor are not quickly realized, then we will be facing a revolution. Look for examples of other countries and systems that have ignored the needs of the people. Revolutions brought them down. When it happens, it will come with no warning and then it will be too late to stop it.

  • lowCal90

    Ten years ago, the interest on the Federal debt was about $100 billion less per year than it is today.

  • Helen North Ga Mountains

    If someone pays 30% or higher on their income and then invests it then it should be taxed again and again and again after they have already earned it the first time. Abolish pre tax investments like 401k and IRA that accumulate wealth and send the the money to Washington so they can pay us more for Social Security and Medicare.

  • Elliot J. Stamler

    If you want to absolutely destroy the Democratic Party and any chance of sensible moderate, centrist Democratic rule in this country, then you can adopt Piketty and Stein’s quasi-socialist ideas about the capital gains tax. I won’t here get into a debate: the elimination of the cgt is NOT ever going to happen (and shouldn’t) and this is the exact kind of extreme, LEFTIST nonsense which if pushed leads us to a result of a Nixon pulverizing McGovern and a Bush pulverizing Dukakis. Anyone who truly believes that repeal of the cgt is a good idea should to be intellectually honest join the socialist party. See how far that party has gotten in America. Just as the right-wing nuts think there is a secret majority of the country in favor of their ideas so do the left-wing nuts think there’s one for their ideas. Wake up and smell the coffee!!!