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Four years ago, conservatives mocked Joe Biden's suggestion that paying taxes is "patriotic." Now, some on the right are praising Facebook co-founder Eduardo Saverin as "an American hero" for renouncing his U.S. citizenship in order to avoid paying millions in future capital gains taxes.  Leaving aside Saverin's dubious denial and the fact that he owes America "nearly everything," this tale of betrayal is filled with ironies.  After all, the 15 percent capital gains tax rate isn't just at a historic low.  Despite right-wing mythology to the contrary, lower capital gains taxes increase income inequality - and not investment - in America.  And in our not-too-distant past, capital gains tax rates were twice as high and the same for income from wages and salaries when Ronald Reagan was in the White House.

As Paul Krugman recounted earlier this year, today's low capital gains rate evaded by Eduardo Saverin -and enjoyed by Mitt Romney - hasn't always been 15 percent. In the 1970's, it reached 39.9 percent.  But while Ronald Reagan's massive 1981 supply-side tax cuts lowered the capital gains rate to 20 percent, just five years later the Gipper's 1986 tax reform raised it again.  As former Reagan domestic policy adviser Bruce Bartlett explained:
"Keep in mind that one of the most important elements of that deal was that Ronald Reagan agreed to raise the capital gains tax rate from 20 percent to 28 percent, because he agreed with the Democrats that capital gains and ordinary income ought to be taxed at the same rate."
As Reagan famously put it, "Do you think the millionaire ought to pay more in taxes than the bus driver or less?"

Since that time, unfortunately, successive presidents of both parties reduced the capital gains rate on investment income because they wrongly believed, the Washington Post explained, "it spurs more investment in the U.S. economy, benefiting all Americans."

But as Jared Bernstein demonstrated with the chart below, there's no evidence to support that claim.

Bernstein found that that the business cycle, not acts of Congress, drive investment in the U.S.

Hard to see anything in the picture supporting the view that either the level or changes in cap gains taxes play a determinant role in investment decisions.

Remember, the ostensible reason for the favoritism in tax treatment here is to incentivize more investment and faster productivity growth.  But that's not in the data and the reason it's not in the data is because investors aren't nearly as elastic to cap gains rates as their lobbyists say they are (more precisely, they'll carefully time their realizations to maximize their gains around rate changes, but that's not real economic activity-that's tax planning).

Reviewing other analyses, Brad Plummer of the Washington Post concurred with that assessment that low capital gains taxes don't necessarily jump-start investment in the economy:
The top tax rate on investment income has bounced up and down over the past 80 years -- from as high as 39.9 percent in 1977 to just 15 percent today -- yet investment just appears to grow with the cycle, seemingly unaffected...

Meanwhile, Troy Kravitz and Len Burman of the Urban Institute have shown that, over the past 50 years, there's no correlation between the top capital gains tax rate and U.S. economic growth -- even if you allow for a lag of up to five years.

Billionaire Warren Buffett, the inspiration for the "Buffett Rule" advocated by President Obama and his Democratic allies, couldn't agree more.  As he told the New York Times last year:
"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."
But if lower capital gains tax rates have had little impact on investment, they have had an outsized impact on income inequality in the United States.

Last fall, the nonpartisan Congressional Budget Office (CBO) confirmed that while the total federal tax burden was at its smallest level in 60 years, the income gap had grown to its largest in 80.  And as the Congressional Research Service (CRS) explained in December, the rapid growth of capital gains income for the richest Americans is fueling it:

Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.
In September, an analysis by the Washington Post similarly concluded that "capital gains tax rates benefiting wealthy feed [the] growing gap between rich and poor."  As the Post explained, for the very richest Americans the successive capital gains tax cuts from Presidents Clinton (from 28 to 20 percent) and Bush (from 20 to 15 percent) have been "better than any Christmas gift":
While it's true that many middle-class Americans own stocks or bonds, they tend to stash them in tax-sheltered retirement accounts, where the capital gains rate does not apply. By contrast, the richest Americans reap huge benefits. Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.
This convenient chart tells the tale:

As the New York Times uncovered in 2006, the 2003 Bush dividend and capital gains tax cuts offered almost nothing to taxpayers earning below $100,000 a year. Instead, those windfalls reduced taxes "on incomes of more than $10 million by an average of about $500,000." As the Times explained, "The top 2 percent of taxpayers, those making more than $200,000, received more than 70% of the increased tax savings from those cuts in investment income."

It's no wonder that between 2001 and 2007- a period during which poverty was rising and average household income had fallen - the 400 richest taxpayers saw their incomes double to an average of $345 million even as their effective tax rate was virtually halved. As the Washington Post noted, "The 400 richest taxpayers in 2008 counted 60 percent of their income in the form of capital gains and 8 percent from salary and wages. The rest of the country reported 5 percent in capital gains and 72 percent in salary."

The inevitable result of plummeting tax rates overall and on capital gains in particular, as the Washington Post documented in its jaw-dropping series "Breaking Away," has been widening the chasm between the rich and everyone else in America:

Despite the destruction of their myth of low capital gains taxes, the Republican Party and its water-carriers have a new proposal.  Capital gains taxes, most insist, should eliminated altogether.  As John Tamny explained in his Forbes paean to his American hero Saverin:

Indeed, Saverin's U.S. "de-friend" is great for economic growth on its face, and then the political implications of his move will hopefully pay future taxation dividends that accrue to entrepreneurialism and advancement... Assuming nosebleed rates of taxation were a driver of Saverin's decision, politicians will hopefully see that if too greedy about collecting the money of others, they'll eventually collect nothing.
Tamny's quest is the same one many GOP propagandists pursued when Mitt Romney's shockingly low tax bill came to light in January.  While David Frum declared, "It is not an outrage that Mitt Romney pays a low capital gains tax," James Pethokoukis of the American Enterprise Institute protested that "actually, Mitt Romney's tax rate is too high":
It's real simple: If you think the biggest problem facing the United States today is income inequality, then you should be outraged that Mitt Romney's income tax rate isn't higher. But if you instead think America's biggest problem is high unemployment and a lack of economic growth, then you should be outraged that Romney is paying any income taxes at all. Really.
No, not really. It's not just that Pethokoukis is wrong on the merits. Even Mitt Romney recognizes that lowering the capital gains tax rate to zero is political suicide for Republicans. That's why Romney would only eliminate the tax on investment income up to $200,000 (which, despite his claims, does nothing for the middle class.) It's also why he felt compelled during a GOP debate to refuse Newt Gingrich's offer to wipe out his tax bill by setting the cap gains rate to zero:
"Well, under that plan, I'd have paid no taxes in the last two years."
For once, Romney is telling the truth. Continuing to lower capital gains taxes would be great for the likes of Mitt Romney and former citizen Saverin. It just wouldn't much for the U.S. economy and the vast majority of Americans. And it certainly wouldn't be fair.

Just like Ronald Reagan said.

* Crossposted at Perrspectives *

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Comment Preferences

  •  I have to say that renouncing citizenship (4+ / 0-)

    to avoid taxes makes me physically sick.

    The opportunities Saverin had- and remember that he was a Harvard undergrad, stem from America.  It is more than unpatriotic to denounce his country in order to save paying something back for his opportunities.

    It is downright sickening.  It is contemptable.

    (Of course, Zuckerman waited until after the IPO to get married, thereby potentially avoiding having to share his wealth with his new spouse.)

     Even paying taxes, Saverin would have more money than he could possible spend in his lifetime, and those of his heirs.  But he is thumbing his nose at the country which spawned him.

    No wonder the 1% applauds him.

    If I had a Facebook account, I would cancel it.

    As my father used to say,"We have the best government money can buy."

    by BPARTR on Sun May 20, 2012 at 12:37:37 PM PDT

  •  I Don't Have a Single Problem With Renouncing (3+ / 0-)
    Recommended by:
    happymisanthropy, Utahrd, bepanda

    citizenship. America is a system not an assignment from God. If somebody doesn't like it and can get in somewhere else let them go.

    The problem I have is with a nation philosophically opposed to managing its trade, so that a person can leave the US and take all our advantages with them. It's the same problem I have with Citizens United, businesses that are foreign having more voice in my elections than I can.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Sun May 20, 2012 at 01:17:40 PM PDT

    •  i'd even let him return (1+ / 0-)
      Recommended by:

      at anytime for
      back taxes x 2

      fact does not require fiction for balance (proudly a DFH)

      by mollyd on Sun May 20, 2012 at 01:22:53 PM PDT

      [ Parent ]

    •  Problem is that he makes hundreds of millions... (0+ / 0-)

      ... at our expense by renouncing his citizenship.  The problem is not renouncing US citizenship per se.

      So our laws should not allow this guy to escape taxes on money earned in the US by renouncing US citizenship.

      Even so, it is neither morally nor ethically right to renounce citizenship solely for the purpose of evading normal taxation on money earned here.  The guy is a traitor and shouldn't be permitted to set foot in the US again or benefit from the US or its laws in any other way.

      Please help to fight hunger with a donation to Feeding America.

      by MJB on Sun May 20, 2012 at 03:02:07 PM PDT

      [ Parent ]

  •  Democratic contributions & renouncing citizenship (1+ / 0-)
    Recommended by:

    The guy that owns the Miami Heat also owns a big chunk of Carnival Cruise lines. He inherited his shares from his dad.

    His dad renounced his US citizenship to avoid taxes.

    Now, the Heat owner gives a lot of money to Democrats and some to Republicans.

  •  Savarin and Romney could relate... (0+ / 0-)

    They do their best to avoid paying taxes in their own Country (ok, Savarin is no longer USA Citizen). Mitt with his Cayman Island funds ...
    I wonder if Mitt would consider moving to Singapore, Swiss or the Cayman Islands, if he lost the elections ...

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