President Joe Biden wants to double capital gains tax rates for rich people. It’s not a very good idea.
Strangely, it was Joe Stiglitz, along with Tony Atkinson, who showed that capital tax rates should actually be lower than income taxes, often 0%, and sometimes even negative. This is in accord with the basics of optimal taxation theory from Nobel Laureate James Mirrlees. The basic insight is simple enough: We get less of whatever we tax. Investment makes the future richer, so if we tax investment, then our children, or we in that future, will be poorer than necessary. This is perhaps the most famous result in Stiglitz’s academic career, and much of the rest of his work has been a fleeing from that uncomfortable finding.
The current position is that if a tax collected is really well spent by the government (say upon education), then it’s OK. The problem is that other taxes would provide that revenue to be really well spent without making us poorer over the longer term.
It’s possible to approach the same point from another direction. Thomas Piketty told us that richer folks get higher returns on their investments than us mere normal ones. That’s because they have access to different investment possibilities. They can get into venture capital, for example. The rest of us tend to save in second-hand things, used equities and bonds, for example, which don’t finance real and new investment. The conclusion from this is that as it’s real and new investment that makes the future richer, it should be us middle-class folks paying more in our 401 (k)s.
Sure, the politics doesn’t work this way, and I’d not want to seriously suggest it either. But that is what the proper economics is telling us. It is exactly those folks getting stupendously rich by starting and financing real new businesses that we want to be taxing at lower rates, possibly even a rate of zero. As Paul Graham has just pointed out, that is how people get rich these days too. The grand fortunes come from real economy entrepreneurs these days, not from rentiers, inheritors, or political courtiers.
On the other hand, many liberals just want to tax rich people a lot. Not for any logical economic reason, just because they want to tax rich people a lot. This is something we might describe as a prejudice, a preconceived reason that is not based upon logic or evidence. The science tells us not to, but then it’s amazing how little attention is insisted upon how we must “follow the science” when this conflicts with progressive prejudice.
It’s almost like we keep being given excuses for bad taxes rather than serious rationales, isn’t it?
