From: MEDELMA@cms.cc.wayne.edu (Michael Edelman)
Subject: Re: why progressive tax rates (was Re: Clinton's Economic plan attacked)
Organization: Wayne State University, C&IT
Date: Tue, 18 Aug 1992 17:25:13 GMT

In article <36956@sdcc12.ucsd.edu>
jlodman@cs.ucsd.edu (Michael Lodman) writes:
 
>
>In article <1992Aug17.174255.16003@ncrcae.ColumbiaSC.NCR.COM> ernie@ncrcol.ColumbiaSC.NCR.COM (Ernie Corley) writes:
>>Actually, the poor would benefit quite a bit from a capital gains tax
>>cut.....  much more so than the rich.  Investment fuels the
>>economic engine that creates jobs, creates prosperity, and creates
>>opportunity for ALL to advance!
>
>I've always had trouble with this. What else are investors going to do with
>their money?
>
>I suspect this is nothing but Reaganomic brainwashing.
>
>--
It's always surprising to me that people who are otherwise well educated
in some narrow field fail to realize that economics is a bit more complicated
than their simple intuition would suggest!
 
High capital gains taxes combined with ordinary levels of return on investment
and low inflation can result in effective marginal tax rates exceeding 100%.
The math is trivially simple. Try it yourself. Assume an inflation rate of
4%, a bank account yielding 6% and a marginal income tax rate of 30%. That's
an average middle-income scenario. Now compute the actual inflation-adjusted
marginal tax rate on a $100 investment:
 
Initial deposit:               $100
Nominal return after one year: $106
Nominal Profit:                $  6
Tax:  (roughly)                $  2
Actual inflation adjusted
       return: (approx)        $  4
Real marginal tax rate:          66%
Real return on investment:        2%
 
 
Trading in the short term can easily result in tax rates exceeding 100%.
What does this do to investment? Investors are intelligent, rational
beings; they're not going to invest their money for a loss. WHat happens
is that the tax structure pushes capital into government securities,
underground, or overseas.
 
The flight of capital to Mexico has far less to do with labor costs- much
of which are balanced by training costs, lower production, transportation
and so forth- than by the tax on capital. It's interesting to note that many
European countries that are far more paternalistic and socialist than the
US- Germany is a good example- don't have this hostility to business.
Consequently they have low or negligible capital gains taxes and profitied
well from that policy.
 
Everytime capital gains taxes have been cut in this country there has been
an *increase* in tax revenue as properties changed hands and profits were
taken. This is to be expected, as investors have learned from experience
thta such tax cuts are often temporary and balanced by other increases. A
permanant elimination of capital gains taxes would bring a lot more capital
back to US shores.
 
>Michael Lodman  Department of Computer Science Engineering
>        University of California, San Diego
>jlodman@cs.ucsd.edu                   (619) 455-1500 x2627
-----------------------------------------------------------------
 Michael Joseph Edelman           Wayne State University
 medelma@cms.cc.wayne.edu         Computing & Information Technology
 mje@pookie.pass.wayne.edu        Detroit, Michigan
 medelma@waynest1.bitnet          (313) 577-0742
Newsgroups: talk.politics.misc,alt.politics.elections,alt.politics.clinton,alt.politics.bush