Tax simplification - Capital Gains

All the talk of tax simplification makes me lift an eyebrow a little.  Sure the tax code is full of gimmicks and needless complexity, but much of the tax code needs to be complex. Much of what has been sold as tax simplification in the past has simply allowed sharp operators (with clever accountants or lawyers) to avoid paying their fair share of taxes.  For every tax provisions we need to balance:


1.  The need for complexity to avoid tax avoidance with


2.  Fairness and simplicity for those who don't want to hire professionals to handle their taxes.


Income from Capital Gain has been treated better than other kinds of "ordinary income" since Republican tax cuts in 1921.  There is good reason to treat it somewhat differently.  Different kinds of capital gain can have significantly different characteristics.  If you bought $50 worth of stock two months ago and sold it for $100 you probably have $50 in real profit.  Why should that be taxed lower than $50 earned in wages?


But if Uncle Joe bought a farm 30 years ago for $50 and sells it this year for $100 he may not in fact have any profit, since $50 today is worth far less than $50 was 30 years ago.


The tax code used to reflect the difference in the types of capital gain to a much greater extent, but after frequent lowering of Capital Gains tax rates over the last 30 years currently people who profit from selling assets now pay far less tax than people living on wages or rents or other ordinary income.


Why should capital gains get much better tax treatment than a paycheck?  The big argument for lowering Capital Gains taxes is that it spurs investment.  Proponents of tax cuts have thrown that argument to support tax cuts for 30 years but the data over the last 30 years contradicts that claim.  History shows when there is a dearth of money available for investment, a lower tax rate on capital gain may spur productive investment.  But that situation is long gone in the United States.  We have huge institutions, banks, investment businesses, pension funds and Unions with trillions of dollars they need to invest, all scrambling to try to find someplace to put their money to make a decent return.  As evidence I note that since the Capital Gains tax cuts in the 1980's and 1990's we have had bubbles in virtually every possible asset someone could invest in (currently gold - it was around $30 an ounce 30 years ago, is up around $1600 an ounce today).  We have a glut of investment capital looking for return.  We do not need a special capital gains tax rate to spur investments and in fact the low rates have contributed to instability in the economy.


I think tax simplification should treat capital gains just like any other kind of income.  But in determining the amount of the sale price that is "gain" we should reduce the amount of the proceeds by:


1.  The amount that was paid for the asset.


2.  A standardized inflation factor that adds an amount to what was paid for the asset to offset the impact of inflation over the years the asset was owned.


This will be a tough sell in Washington as a lot of wealthy folk who will want to keep the special tax benefit they have enjoyed for the last couple decades.  But if fairness and appropriate complexity are our goal, this is one step toward that goal.