Friday, February 6, 2009

Rush Limbaugh and Taxes: Why Rush Is WRONG (Part 1: Capital Gains)

I have stated in this blog, correctly, that Rush Limbaugh--by default--is now the "leader" of the conservative movement in this country. In other words, it is what Rush Limbaugh thinks that basically determines conservative "orthodoxy" in this country--not, for example, what the Republican Party "thinks". WARNING: This entry will tell you why I call myself a "maverick" conservative. I am about to tell you that Rush Limbaugh is wrong on taxes, as is the Repubican Party (but this is a DUH!!!!, since the Republican Party no longer has reliable conservative instincts). I do not pretend that what I am going to tell you is conservative orthodoxy--even from the point of view of conservative talk radoid, which is really defining modern conservative orthodoxy (good thing, and not at bad thing, except that it means the Repubican Party has abandoned conservatism). In my defense, I can only point out that I am right on this and Rush Limbaugh is wrong. Here is why Rush Limbaugh is wrong on taxes:

1. Limbaugh, and most conservatives out there, are propsoing a temporary ELIMINATIN of the capital gains tax. This is absurd public policy. First, it is a Wall Street policy, and not really a policy to stimulate the economy. It has been on the Wall Street wish list for years. It is an example of how even conservatives like Limbaugh, who will trash the newly minted Communists on Wall Street, still are controlled by the old Wall Street orientation of the Republican Party . This capital gains tax idea is Larry Kudlow territory, and that alone should make it questionable. In fact, Rush specifically said that eliminating the capital gains tax, for one year, would cause "Wall Street" to immediately jump 500 or a 1000 points--as if that would be a good thing instead of an illusstration of why the stock market is sick. This idea that Wall Street knows what is good for the country, and that these fictional, computer driven wild stock swings are good for the country, is an illusion Limbaugh (and conservatives) need to get over. However, this is the least of the problems with a "temporary suspension of the capital gains rate.

Limbaugh says that a one year suspension of the capital gains rate will "stimulate investment". Hogwash. This is not true, and Limbaugh knows it. This is an attempt at leftist type deception. Now there is some argument that permanenly elimination the capital gains rate would "stimulate" people to "invest" in their businesses, to crate non-taxable capital gains, instaead of paying themselves salaries which would be taxable. This is not a good thing. It is a bad thing. See the next paragraph. However, even that incentive to build up capital assets does not happen if people know that the tax is going to "spring" back into effect a year from now. In fact, during that year, people will have a perverse incentive to cash in on the capital gains moraorium by selling capital assets. Limbaugh made this very same argument against the proposed Obama raise in the capital gains tax. A temporary capital gains tax suspension is inane public policy, and Limbaugh well knows it. I regard Limbaugh as a very smart man (if not quite as smart as I am). The explanation hee is that Limbaugh, and conservatives in general, want to eliminate the capital gains tax anway. Like Democrats are using are present economic policies to pass spending they want anway, Limbaugh and conservatives are trying to "use" our economic problems to push their unjusitifed obsession with elimination the capital gains tax. Their intention is to use a "temporary" suspension of the capital gains tax as a wedge to enact a permanent abolition of the capital gains tax. Won't work. It is too bovious, and the general public (rightly) does not share this perverse conservative obsession with the capital gains tax--an obsession that originally comes from the self-interested people on Wall Street. Democrats, with media support, may get away with these deceptions. Conservatives are never going to get away with arguing that a capital gains tax "restoration" at the end of the "temporary" period will hurt the economy, and therefore enact the permanent elimination which was the conserative goal in the first place.

Okay. I have shown that the "temporary" caopital gains tax suspension would be absurd public policy, and that--as a tactic--it will not work. But why is a permanent elimination of the capital gains tax a bad idea?

It is a bad idea because it violates one of the fundamental principles of a tax code. What you need to avoid, in a tax code, is giving people incentives to do things solely to avoid taxes. You need to avoid giving people incentives to play games just to reduce their taxes. What happens if the tax on ordinary income is 35% and the tax on capital gains is zero? Right. Everybody immediately starts trying to convert ordinary income into capital gains. It is not that hard to do, especially if you have a big incentive to do it. Instead of taking a large salary, you try to build up capital assets (the way in which elimination the capital gains tax permanently--not temporarily--would help give incentives for capital investment, but "capital investment" skewed to much by the tax code--a direct tax break on "capital investment" being a more direct way to use the tax code to "stimulate" investment). An elimination of the capital gains tax will cause schemes to convert ordinary income to capital gains to come out of the woodwork This is exactly the kind of thing you want to avoid with a tax code. You want people to make decisions based on the real econics, and not because of taxes. Nope. It is a bad idea. The benefits are speculative, and the downside is obvious.

The present 15% capital gaisn rate is about right (especially if the income tax rate was reduced). If people invest for the long term (at least six months or a year), they should not have to pay ordinary income rates. But you don't want to encourage game playing based on the tax code. The 15% rate is a good compromise. I would definitely not raise that rate. But neither would I lower it. The "benefits" are totally speculative, and complex to analyze (and sell), while the detriments are obvious. As stated, conservatives have to get over this obsession with the capital tains rate. It is a betrayal of the Reagan idea of simple tax concepts that peole cnan understand. You can easily understand why people who invest their money for years should not pay the same ordinary income rates as people who buy and sell any product (including stocks) daily. It is not so easy to understand (and impossible if you truly realize the perverse incentives involved) that people should be able to avoid ordinary income taxes altogether simply by converting the income to capital gains. Nope. This is almost a neurotic disease with conservatives. Get over it. It is a loser. Go back to the Reagan philosophy of simplicity in the tax code. Lower rates, yes, but in the context of a SIMPLE tax code that everyone can understand, and which does not encourage manipulation by the "smart guys" totally for tax purposes.

P.S. No, I am not quite certain how this "temporary" suspension of the capital gains tax would work (since it will not work, under any circumstances). The downside (massive selling) of "springing" the tax back into existence after one year is so obvious, you would think that smart people realize they cannot ever sell that idea as other than a transparent deception. However, what about eliminating the capital gains on any capital asset purchased during the next year. Now that one would "encourage" investment all right, but with possibly even more perversity. What about coporatioins already in existence? Pruchasing capital equipment would NOT be "purchasing an asset". Again, people would be getting a central planning incentive to base their decisions on the tax code rather than economics. Trust me. This idea (and I have not heaard it asserted as the idea behind a "temporary" capital gains tax suspension, perhaps for good reason) is a truly terrible idea that would destroy the economy as the end of the capital gains suspension arrived. It is really, as is true of the whole "temporary" trax relief idea, merely a central planning "fix" for the conomy that distorts the economy. Yes, you might regard any capital gains elimination as better than the direct, central planning piking of winners an dlosers that is going on now, with the Democratic pork bill and the prior Paulson/Bush bailouts. Boy, is that "damning with faint praise". A bad idea does not become "good", simply by comparing it with a worse idea.

See further entried for continuation of the critical analysis of Limbaugh, consrvative, and Republican tax relief proposals--all of which represent a failure to learn from how Ronald Reagan acieved his tax revolution--a tax revolution from which we have been retreating ever sinc (to our shame and detriment, and certalinly to the detriment of conservatives).

No comments: