PF Feb 2018 - Abolish Capital Gains Tax - Con Position

Resolved: The United States should abolish the capital gains tax.

Con Position

The topic of taxation is complex and there are many nuances to understanding how the laws work. For this reason, there is literally an army of attorneys who have very lucrative careers helping their corporate and citizen clients navigate through the murky waters. I think PF debaters do well, to avoid much of the complexity (assuming they understand it in the first place) and remember to tailor arguments toward the audience, which happens to be the everyday "man or woman from the 'street'"- type judge. For most people, the idea of taxes can be boiled down to a very simple concept. The government needs money to pay for its expenses, like military, infrastructure, social programs, etc. The government gets the money from various kinds of taxes of which capital gains tax (CGT) is one source. If there are no taxes, the government is deprived of that income. At the risk of getting slightly more complex, we can refer to the Laffer Curve which illustrates a theory that as the tax rate for businesses increases from zero, the revenue the government acquires increases. That continues until a certain point in which the tax rate, become so great, the corporations begin to find ways to avoid paying the tax and so revenues to the government begin to decline. So, Laffer theorizes there is a certain "sweet spot" or tax percentage that maximizes government revenue but beyond which revenues begin to fall off. In short, the government can only tax so-much before those lawyers mentioned previously, kick-in with new ideas about how to avoid the tax. Okay. It's over-simplified, but it is a basic concept that most judges and students should probably comprehend with little difficulty.

Obviously, companies and people, put money into investments with the aim to make more money. It is an investment because it is intended to increase in value and in the future, the one paying-in can hopefully sell (realize the investment) and make a profit. That profit is the capital gain which is taxed. The Pro side is going to claim, this tax discourages these investments and they will claim, businesses will want to hold the investments as long as possible in order to avoid paying the tax when they "cash-out". The Pro will argue that abolishing the tax, will allow corporations to unlock that cash sooner and put it back into circulation in the economy, thereby stimulating economic growth. It's this simple: I can't spend money I have locked up in an investment until I realize the investment (cash out). If I cash out my investment, I can spend it which helps the economy. But, I am reluctant to cash-out early because Uncle Sam is going to take a big chunk of it.

The Con position position will challenge the logic that capital gains realization can stimulate the economy and if there were no tax on capital gains, the government will lose a significant source of revenue. The Con will also challenge the logic the capital gains tax (CGT) reduces corporate investments.

CGT Provides Government Revenue

In the status quo, capital gains taxes are a significant source of revenue for the federal government which would obviously be lost if CGT were abolished.

Garofalo 2011:

Republicans have proven time and again that they really love tax cuts for the wealthy, but completely eliminating the capital gains tax is nothing but a pure handout to the ultra-rich. At the moment, the richest 0.1 percent of Americans pay 44 percent of the capital gains tax, and 68.3 percent of the tax is paid by the richest 1 percent. The bottom 95 percent of Americans pay just 10 percent of capitals gains taxes.
But the tax still brings in a substantial amount of revenue. Complete repeal, using data from the Congressional Budget Office, would cost about $1 trillion over 10 years.

Cutting or eliminating capital gains taxes provides enormous benefits for entities that take-in a significant portion of their annual income from capital gains as opposed to ordinary income from wages. These cuts in CGT will encourage the establishment of more tax shelters while driving a shift away from income on wages. Note that when entities see much lower (or zero) rates of taxation on capital gains, there is an incentive to shift from earnings on income from wages or goods to a capital gains model of earning income. This further impacts government revenues since the revenue from tax on wages or goods will decrease.

Burman & Gale 1997:

Cutting capital gains taxes would increase the difference between capital gains and other income and boost the tax sheltering industry. Shelters waste economic resources (remember the empty office buildings of the 1980s?), and make taxes less fair and more complex. They also drain revenues from the Treasury. Advocates like to assert that capital gains tax revenue rises when capital gains tax rates are cut. The result, even if it were true, is misleading. The point of shelters is precisely to shift income from highly taxed to lowly taxed forms. For example, when lower taxes on capital gains cause an executive to shelter income by switching the form of compensation from wages to stock options (which generate capital gains), revenues from capital gains taxes increase, but tax revenues from wages fall by even more, so overall revenues fall.

To personalize this contention a little more, think of it this way. Suppose your source of income is an ordinary job, in which you pay an income tax on your wages. Your friend does not work an ordinary job, but gains income by investing and strategically cashing-out investments which, is taxed at a much lower or zero rate. Why would you continue to work and earn income that is taxed when you can earn income from investments which are not taxed? The current law gives unfair preference to capital gains.

Anrig 2011:

The labor each worker engages in contributes directly to the economy day in and day out, while buying, holding, and then selling investment securities is a much more passive undertaking that may or may not add to the nation's productive capacity. A man of leisure who collects $75,000 in capital gains income owes less in taxes than working parents holding down multiple jobs who together earn the same amount. It is long past time to restore a modicum of fairness to the tax code and end the tax-favored treatment of capital gains.

CGT Should be Taxed Like Ordinary Income

As noted in the previous section, we see the potential for the loss of significant government revenue, which if not offset by a corresponding cut in government spending, will increase the federal deficit even more. Moreover, as already discussed, the disparity between taxes on capital gains versus ordinary income benefits the wealthy and encourages tax shelters and shifting of income away from ordinary income. Moreover, maintaining or increasing CGT to reduce the disparity does not impact the majority of citizen tax payers since they pay very little CGT.

Anrig 2011:

If capital gains were to be taxed as ordinary income, about 72 percent of the additional revenue to the government would come from the 0.3 percent of taxpayers with annual incomes above $1 million, according to an analysis by the Tax Policy Center. Fully 92 percent would be paid by those with incomes above $200,000. Fewer than 10 percent of taxpayers earning below $75,000 would experience any increase at all, and on average the tax increase for that large swath of the population would be below $50.
Most Americans earning under $100,000 a year who own mutual funds, stocks, and bonds hold those assets in retirement and other tax-deferred accounts that are not subject to capital gains taxes. Only the wealthy can afford to max out on the annual contribution limits to those accounts and have their remaining securities transactions exposed to capital gains levies. That's why so few average households would be affected by eliminating the exclusion. 

Remarkably, billionaire Warren Buffett was an unexpected advocate for eliminating laws which favored the wealthy. Buffett has consistently argued that reduction in CGT does not impact corporate investment positively or negatively. If corporations see a chance to make money with minimal risk, they will do it, regardless of the tax rate (which is already considered in the risk assessment).

Garofalo 2011:

As billionaire investor Warren Buffett wrote in an op-ed, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.” Indeed, the conservative claim that lower capital gains rates leads to increased investment and job creations doesn’t hold up to scrutiny. Perhaps that’s why conservative icon Ronald Reagan actually equalized the capital gains rate with the regular income rate, a fact that conservatives tend to forget.

Eliminating the disparity between ordinary income and CGT actually eliminates one particular persistent loop-hole known as "carried interest" (I will leave it to you to research) because there is simply no credible evidence the disparity between the CGT and income tax is beneficial to anyone except the wealthy.

Stewart 2011:

Proponents of lower — even zero — capital gains rates have some academic research and statistics to support their claims. Still, there’s no doubt that the root of the problem highlighted by Mr. Buffett is the disparity between tax rates on capital gains and ordinary income. Were these rates the same, the debate over how to treat carried interest would vanish, along with much of the disparity between tax rates for the rich and people like Mr. Buffett’s secretary.
Is that so unthinkable? It does seem intuitive that lower taxes and thus potentially greater rewards would encourage risk-taking and investment, and surely at some rate high taxes can discourage any endeavor. But even some hedge fund and private equity officials concede that the argument for lower capital gains rates rests more on faith than science. “I’ve seen study after study that says lower capital gains rates have no impact on behavior,” the hedge fund official told me.
That view is also backed by a growing amount of academic research questioning the premise that lower capital gains rates promote growth. The evidence “is murky, at best,” said Leonard E. Burman, the Daniel Patrick Moynihan professor at the Maxwell School of Syracuse University. Mr. Burman is also a former deputy assistant Treasury secretary for tax policy in the Clinton administration and author of “The Labyrinth of Capital Gains Tax Policy.”

Abolishing CGT Hurts the Economy

So in keeping with the arguments already presented we understand the risks for the government of loss of revenue and increasing deficits are real unless it can be offset either by cutting government spending or increasing economic activity and production. The U.S. has already seen periods where the CGT tax rates was cut well below current rates and the expected increase in production was non-existent. In fact, some authors see such cuts are directly damaging to the nation's economy.

Hungerford 2010:

Furthermore, it is argued that a temporary or permanent capital gains tax reduction is an effective economic stimulus measure. An effective short-term economic stimulus, however, will have to increase aggregate demand, which requires additional spending. A tax reduction on capital gains would mostly benefit very high income taxpayers who are likely to save most of any tax reduction. Economists note that a temporary capital gains tax reduction possibly could have a negative impact on short-term economic growth. A temporary tax cut could induce investors to sell stock (i.e., realize capital gains by reducing the lock-in effect), but provides no incentive to invest since investors know they will face higher tax rates in the future. To the extent that the resulting sell-off depresses stock prices, consumer confidence, already low during recessions, could be further undermined thus reducing consumer spending. [12]

In answer to this, Pro is likely to claim, Hungerford addresses short term reductions in the CGT rate while the resolution calls for a total abolition of the tax which presume if long-term. Con can continue to claim that tax reductions or elimination are not significant influences on economic performance and staking our future on this mistaken belief causes long-term damage to the economy.

Berstein 2017:

There are a few economic principles that we consistently get wrong in ways that do lasting damage to our economy and diminish our future. At the top of this list are arguments about large behavioral responses to changes in tax rates. I don’t think it’s zero, but I’ve simply never seen compelling evidence that tax increases significantly hurt growth, labor supply, jobs, wages, or that rate decreases provide much of a boost the other way. And when you factor in the benefits of the investment and services government provides — something the literature tends to ignore — the hyper-responsiveness arguments are even less compelling.

Cutting CGT is Not Beneficial

So let us just state what the Con evidence proves. There is zero benefit to cutting CGT. This is proven by multiple sources and studies.

Burman 2012:

If low capital gains tax rates catalyzed economic growth, you'd expect to see a negative relationship--high gains rates, low growth, and vice versa--but there is no apparent relationship between the two time series.  The correlation is 0.12, the wrong sign and not statistically different from zero.  I've tried lags up to five years and also looking at moving averages of the tax rates and growth.  There is never a statistically significant relationship. Does this prove that capital gains taxes are unrelated to economic growth? Of course not. Many other things have changed at the same time as gains rates and many other factors affect  economic growth. But the graph should dispel the silver bullet theory of capital gains taxes.  Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.

Continued claims that reducing or eliminating the capital gains tax beneficial to the economy are empirically denied. Over the last 50 years the tax rate has been lowered and increased and economists have noted no negative or positive influences on economic growth in the country as a result 

Huang & Marr 2012:

University of Michigan tax economist Joel Slemrod, another of the nation’s leading tax policy experts, has found that “there is no evidence that links aggregate economic performance to capital gains tax rates.” Similarly, TPC has found no statistically significant correlation between capital gains rates and real GDP growth during the last 50 years. In addition, a new CRS report analyzing capital gains tax rates and economic growth finds that “analysis of such data suggests the reduction in the top [capital gains] tax rates have had little association with saving, investment, or productivity growth”.[3]

Abolishing CGT Increases Inequality

The U.S. Congress has already built-in a well-documented preference for the CGT into the tax code. By that, I mean tax law favors and encourages capital gains by keeping the rates below the tax rates for ordinary income. Even with that preference, the current rate has little impact on investments because in most cases, corporations avoid paying the tax altogether.

Huang & Marr 2012:

The large tax preferences that capital gains enjoy over “ordinary” income, such as salary and wages, add to budget deficits, widen income inequality, and do little if anything to promote economic growth. Recent bipartisan deficit commissions have called for eliminating or sharply reducing these tax preferences, as the landmark 1986 Tax Reform Act did. By doing so as part of a package that reduces deficits and reforms the tax code, policymakers could help put the nation’s fiscal house in order and make the tax code fairer and more efficient. The tax code now strongly favors capital gains — increases in the value of assets, such as stocks and real estate — over ordinary income. Not only is the capital gains tax rate far below the top tax rate on ordinary income, but taxpayers can delay paying taxes until they realize their capital gains (usually when they sell assets). In many cases, taxpayers can avoid paying capital gains tax altogether; about half of all capital gains are never subject to capital gains tax, according to the Congressional Research Service (CRS). [1]

The preference for CGT contributes to the ongoing problem of income disparity in this nation. The rich get richer and the poor get poorer. 

Huang & Marr 2012:

Capital gains are heavily concentrated at the top; the top 1 percent of taxpayers will receive 71 percent of all capital gains in 2012, according to TPC. This means that the benefits of the tax breaks for capital gains flow overwhelmingly to the highest-income taxpayers, while delivering negligible benefits to the large majority of taxpayers. TPC estimates, for example, that the benefits of the preferential rates on capital gains and dividends raised the after-tax incomes of the top 0.1 percent of taxpayers by 7.5 percent — an average of $356,750 for each such taxpayer in 2011, while raising after-tax incomes among the middle fifth of households by just 0.1 percent, or an average of $23. The tax preferences for capital gains are a key reason why the tax code violates the “Buffett rule,” which essentially says that people at the top shouldn’t face lower tax rates than middle-income households. By making the tax code less progressive, these tax preferences also worsen after-tax income inequality, which has risen to historic levels in recent decades. Between 1996 and 2006, “changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality,” according to CRS.[2]

The income inequality continues to place the burden of covering the run-away spending and soaring federal deficits squarely on the backs of the average tax-payer.

Huang & Marr 2012:

The tax breaks for capital gains also are inequitable in another way. A taxpayer who earns most or all of his income from a salary will pay much more of it in taxes than a taxpayer who makes the same amount of income primarily in the form of capital gains. In 2011, households with incomes between $100,000 and $200,000 who got more than two-thirds of their income from investments taxed at the preferential capital gains and dividend rates owed only 5 percent of their incomes in federal income and payroll taxes, on average, TPC data show. That’s about a quarter of the 19.2 percent rate faced by households who earned the same total income but received less than one-tenth of it from capital gains and dividends [3]

The Real Winners

The Pro claims that abolishing CGT is good for America. It will stimulate the economy. But as we have shown there are no observed evidences that these claims are valid. In fact, we could argue the Pro claims are promoted by those who are more likely to benefit from no CGT, while ordinary citizens continue to bear the costs of increasing U.S. deficits. This is a voter for fairness and equity.

Nevertheless, Con will concede at least one industry will enlarge and begin to hire more employees, if the CGT is abolished. Burman clarifies:

Burman 2012:

Low capital gains tax rates do accomplish one thing: they create lots of work for lawyers, accountants, and financial geniuses because there is a huge reward to making ordinary income (taxed at rates up to 35%) look like capital gains (top rate of 15%).  The tax shelters that these geniuses invent are economically inefficient, and the geniuses themselves might do productive work were the tax shelter racket not so profitable.  And the revenue lost to the capital gains tax loophole adds to the deficit, which also hurts the economy. Thus, it's no surprise that there's no obvious relationship between capital gains tax rates and economic growth. Indeed, the low rates on gains might do more harm than good.

For all these reasons and more we urge a Con ballot.

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Sources:


Anrig, G (2011), 10 Reasons to Eliminate the Tax Break for Capital Gains,The Century Foundation, https://tcf.org/content/commentary/10-reasons-to-eliminate-the-tax-break-for-capital-gains/


Bernstein (2017), Taxing Capital Gains at Ordinary Rates: Evidence Says Do It... So Does Buffett, The Huffington Post, Dec 06, 2017. https://www.huffingtonpost.com/jared-bernstein/warren-buffett-capital-gains-tax_b_932625.html


Burman, L (2012) Capital Gains Tax Rates and Economic Growth (or not), MAR 15, 2012, Forbes.  https://www.forbes.com/sites/leonardburman/2012/03/15/capital-gains-tax-rates-and-economic-growth-or-not/#5c2a575c1e2e


Garofalo, P (2011) Five GOP Presidential Candidates Have Proposed Eliminating Capital Gains Tax, a $1 Trillion Giveaway to the Rich, Friday, September 02, 2011, Truthout. http://www.truth-out.org/news/item/3086-five-gop-presidential-candidates-have-proposed-eliminating-capital-gains-tax-a-1-trillion-giveaway-to-the-rich#15171534496371&action=collapse_widget&id=0&data=


Huang CC, Marr, C (2012) RAISING TODAY’S LOW CAPITALGAINS TAX RATESCOULD PROMOTE ECONOMIC EFFICIENCY AND FAIRNESS, WHILE HELPING REDUCE DEFICITS, Center on Budget and Policy Priorities, September 19, 2012. https://www.cbpp.org/sites/default/files/atoms/files/9-19-12tax.pdf


Hungerford, TL (2010), The Economic Effects of Capital Gains Taxation, Congressional Research Service, June 18, 2010. https://fas.org/sgp/crs/misc/R40411.pdf



Stewart, JB (2011) Questioning the Dogma of Tax Rates, New York Times,Common Sense, AUG. 19, 2011.  http://www.nytimes.com/2011/08/20/business/questioning-the-dogma-of-lower-taxes-on-capital-gains.html