Emory Tax Professor's Nonsense

On March 8, Emory Tax Law professor Dorothy Brown wrote in the New York Times -

There are effectively two tax systems in America: one for the very rich and one for the rest of us. Income from stock dividends and capital gains, which makes up a disproportionate amount of the earnings of the very rich, is taxed at 15 percent. But the bulk of what the rest of us earn — wages and interest from savings accounts — is taxed at up to 35 percent. Though President Obama’s recent tax proposals are progressive and comprehensive, his reforms don’t do nearly enough to address this significant disparity.

She goes on to suggest that an ideal tax on capital would be the same as ordinary income although she also shows a recognition that many taxpayers pay a bulk of their taxes through the Social Security tax (which after all is at half the rate of capital gains). She also suggests that capital losses, which are currently capped at $3000 be raised to $15,000 - why only $15,000? Most other losses are a function of income (there is a percentage exclusion based on income). Obviously, the current code is a mess.

Professor Brown goes on to argue that the taxation of capital gains is one of "fundamental fairness". Evidently Professor Brown did not bother to deal much with economics. The differential rate on capital gains is there to promote capital investments. The current code makes no recognition of the long term nature of capital investments, save for the capital gains rate. Thus, if I invest in an asset costing $100 and its nominal value increases by 50% over the time of my holding it, even if the value is diminished by inflation by 50%, I still pay as if the asset had appreciated. That is a pretty crude measure. Professor Brown's definition of "fundamental fairness" is pretty narrow, as she does not seem to worry about the capital gains exclusion for housing. (Where the rate is effectively ZERO.)

There are lots of ways to improve the tax code in this area. But changes based only on the principle of "fundamental fairness" should not be the only policy view in making the tax code. If we want to promote more savings and investment, then we should lower the rate even more, as we have with capital gains on housing. Or we might index the rate, to more closely reflect the long term nature of investments. Or we might lower all tax rates on investments including interest. But raising the rate, to work with a narrow definition of "fairness" is short-sighted.