Republicans have a new talking point. Because the latest analysis from the nonpartisan Congressional Budget Office forecasts that the Affordable Care Act will give some workers the freedom to work fewer hours or retire early without the fear of losing health insurance, conservatives now regurgitate in unison, Democrats don't "value work."
Of course, that statement is preposterous, and not just because the CBO itself eviscerated the GOP's tried but untrue sound bite. After all, since Herbert Hoover the American economy has generally grown faster, created more jobs, boosted incomes more quickly and even enjoyed greater gains in the stock market when Democratic presidents sat in the Oval Office. Besides, if conservatives really value work, they can they put their money where their mouths are by taxing capital at the same rate as labor.
Narrowing that yawning gap between the tax rates on salary and wage income compared to capital gains and dividends is just one of the measures endorsed by new Senate Finance Committee Chairman Ron Wyden (D-OR). With good reason. Eliminating the preferential treatment for investment income over ordinary income wouldn't just add an estimated $71 billion to the U.S. Treasury in 2014 alone. It would also put the brakes on perhaps the single greatest driver behind America's record income inequality.
Writing in the New York Times on Monday, Annie Lowrey explained that "even among the richest of the rich, fortunes diverge" (see first chart below the break). But it's no secret why the rich are pulling away from everyone else, and the very rich are pulling away from the merely rich. Three years ago, the Washington Post illustrated the dynamic at work in the chart above. Continue below the fold for the full story.
As part of the Post's series on the widening chasm between the super-rich and everyone else titled "Breakaway Wealth," the Post 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.(As University of California economist Emmanuel Saez showed in February, the rapid recovery and expansion of the stock market since the lows of the Great Recession allowed the top 1 percent to grow their incomes by 11 percent between 2009 and 2011, while the other 99 percent of American people continued to lose ground.)
Reviewing another study by Saez and co-author Thomas Piketty, Ezra Klein explained the central role of low capital gains taxes in "how the ultra-rich are pulling away from the 'merely' rich." As Klein noted, "If you don't look at capital gains, the top 0.01 percent only captures 3.15 percent of income in the United States," adding "that's about a third smaller a share as when capital gains are included." All told, the top 10 percent account for almost half of total income in the United States, up from just over 30 percent in 1970.
The impact of the nation's tax policies on income inequality has hardly been a secret on Capitol Hill. In December 2011, Thomas Hungerford of the Congressional Research Service (CRS) authored an analysis which concluded:
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.Last January, the CRS' Hungerford published another study which once again confirmed that historically low capital gains tax rates are "by far the largest contributor" to America's historically high income inequality. As ThinkProgress explained Hungerford's findings, the upward spiral of income inequality (as measured by the Gini coefficient) between 1991 and 2006 is mostly due to federal tax policy that slashed rates on capital gains and dividend income, income which flows almost exclusively to the rich:
By far, the largest contributor to this increase was changes in income from capital gains and dividends. Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. [...]
The large increase in the contribution of capital gains and dividends to the Gini coefficient, however, is due to the large increase in the share of after-tax income from capital gains and dividends, and to the increase in the correlation of this income source with after-tax income.
Now, these levels of income inequality not seen since the Great Depression might be more tolerable if they served to produce faster economic growth and accelerated job creation. But as Jared Bernstein along with Troy Kravitz and Len Burman of the Urban Institute have shown, lower capitals gains tax rates (contrary to the claims of conservative mythmakers) don't fuel increased investment in the America economy.
As Bernstein demonstrated with the chart above, there's no evidence to support the persistent GOP claim that a low tax rate on capital spurs more investment in the U.S. economy, and thus benefits all Americans. Bernstein found that that the business cycle, not acts of Congress, drives 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.Reviewing other analyses in 2012, Brad Plumer of the Washington Post concurred with that assessment that low capital gains taxes don't necessarily jump-start investment in the economy:
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).
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. ...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 in 2011:
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.
"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."As Americans consider the impact of Obamacare on workers' decisions about when and how much labor, they shouldn't be scared, either. As CBO Director Douglas Elmendorf told Congress:
"If someone says, 'I decided to retire or stay home and spend more time with my family and spend more time doing my hobby,' they don't feel bad about it -- they feel good about it. And we don't sympathize. We say congratulations."But House Budget Chairman and 2012 GOP Vice Presidential candidate Paul Ryan said something else. Americans freed to make such career choices are not, Ryan lamented, "getting the dignity of work."
If that phrase sounds nauseatingly familiar, it should. Because during the 2012 campaign, Ryan's running Mitt Romney said much the same thing.
As it turned out, Romney's declaration that "even if you have a child 2 years of age, you need to go to work" because "I want the individuals to have the dignity of work" did not apply to his own wife. As Ann Romney had explained in an October 1994 interview, their dignity was provided by Mitt's father George:
"Neither one of us had a job, because Mitt had enough of an investment from stock that we could sell off a little at a time. The stock came from Mitt's father. When he took over American Motors, the stock was worth nothing. But he invested Mitt's birthday money year to year -- it wasn't much, a few thousand, but he put it into American Motors because he believed in himself. Five years later, stock that had been $6 a share was $96 and Mitt cashed it so we could live and pay for education."Hundreds of millions of dollars later, the Romneys experienced the dignity of work from pocketing investment gains taxed at capital gains rates as low as 15 percent. (Untold millions more nestled in secret Cayman Islands accounts go untaxed altogether.)
Now, there is no shortage of good policy ideas for encouraging work. (Sorry, Republicans, gutting Medicare and Social Security aren't among them.) In addition to boosting the minimum wage, expanding the Earned Income Tax Credit (EITC)—which Ronald Reagan called "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress"—would be a good place to start. Funding for day care, too, would enables mothers and fathers to work more and worry less. Rolling back union-bashing policies would also be a good step towards valuing work and workers. But most of all, the members of the Party of Lincoln should heed the words of its founding father:
"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration."Especially in the U.S. tax code.