Let’s not raise the capital gains tax

That is the topic of my latest Bloomberg column, the vitriol of the Twitter response of course confirms my point.  Here is one excerpt:

First and foremost, any system of taxation is about values. And a much higher rate of capital taxation would undermine some of America’s core values.

A society’s values and its tax regime have to be mutually compatible or they will undermine each other. So the first question about a taxation system is which values it promotes.

The values that the U.S. should prioritize are a valorization of wealth, the encouragement of saving, and the encouragement of children. People may disagree with these priorities — in fact, they disagree quite strenuously! — but for me, it’s important to know whether a proposed tax reform supports or weakens these values. This is a more important consideration than economic calculations of “deadweight loss.”


Values are all the more important for taxation because America is a nation of immigrants. Which is the better message to potential new arrivals? Should it be “America is a great country to get really rich”? Or “Americans are pretty egalitarian, so they won’t let the wealthy get too rich”?

The first message is far preferable — and this is true even if you personally hold fairness to be an important value. It is more important to encourage ambition in those newly arrived to the U.S., if only to take in creative (and yes, sometimes greedy) people who will help solve America’s social problems. Immigrants are responsible for so many of this country’s best and most successful startups.

And note this:

It may well be true that the U.S. has more efficient ways of encouraging ambition and wealth accumulation than the current approach to capital gains taxation. But to make that argument, advocates of the higher capital gains rate need to say what else they would do to boost the valorization of American wealth. Somehow, however, such explanations are never forthcoming — because this debate really is about a clash of values, not just efficiency, and one side wants to lower the status of accumulated wealth.

Like Godot, I will wait forever for an alternative proposal on this matter.  p.s.:

Only a few weeks ago, the prevailing opinion was that it was fine for the federal government to spend an additional $1.9 trillion, because at current margins, deficits don’t matter. Maybe so. But that nonchalance is now mysteriously absent. That too is a sign that, for most people, the values represented by any decision about taxation are paramount.

Of course, if you are doing the comparative statics, the wealthier and more open the rest of the world, the more American should favor its innovators to an extreme.  So the tax on innovation should be falling over time, not rising.



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