Columns » Ernest Dumas

Tax work, not wealth

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The hoary theory that taxing the wealth of people with lots of it is the root of all problems is going to get a new test in Washington, Little Rock and a few other state capitals. The cataclysmic failure of the last test, the Bush tax cuts of eight and 10 years ago and a similar one in Arkansas, are distant memories.

Resurgent Republicans in the U. S. House of Representatives are talking about finally eliminating income taxes on capital gains, now taxed at a top rate of 15 percent. Grover Norquist, the spokesman for Americans for Tax Reform, one of the billionaire boys clubs, was in Little Rock to sell conservative activists, as if they needed persuading, on the perfidies of taxing anyone but working people. Republican lawmakers left determined to take an ax to the Arkansas tax code and free the 15,000 or so Arkansans with lots of passive income to do good works.

You can't make a persuasive argument that rich people and corporations need more money so the appeal is that it's needed to put people to work. Who doesn't want to put people to work?

The Arkansas legislators want to eliminate income taxes on capital gains altogether, apparently both short-term and long-term gains, and repeal the little corporate franchise tax. They probably have the votes to pass the tax repeals. Governor Beebe, who has to balance the precarious state budget, will veto them, but under Arkansas law the legislature if it dares can override his veto with a simple majority.

It is cherished wisdom that taxing investment income—anything but wages and salaries—causes businesses to lay off people or not hire them. Neither logic nor history gives the slightest support to the idea, but that makes no difference.

Reducing or eliminating income taxes on capital gains provably does two things: It leaves more wealth with investors, and it reduces the amount of money government has to deliver services like education, protection and medical care. Everything else is gauzy theory.

The theory is this: When the Waltons—they're easy to pick on because they are successful—see that their federal or state tax bills are a little smaller they will call the Walmart management and tell them they should hire more stock clerks or open a new store somewhere. How likely is that to happen? If lowering or eliminating capital gains taxes spurs hiring it is so minuscule as to be unsupportable.

Businesses hire because there is a sufficient demand for their products and services that they need more employees to provide them. They don't hire because the government leaves investors with some more spare change and they prefer to use it to put someone to work. The Blue Hog Report (www.bluehogreport.com) did some careful calculations of what it would take for repeal of the little Arkansas capital gains tax to even put one minimum-wage worker on the job.

You don't have to take a poor scribe's word for it. There's a long history of fluctuating capital-gains taxation and the economic consequences.

In 1999, the legislature altered Arkansas's capital gains treatment. It was Gov. Mike Huckabee's great claim as a tax cutter. It excluded 30 percent of long-term capital gains from the income tax. What happened? Arkansas employment, which was 1,215,000 and climbing when the law passed, began falling almost immediately and did not return to that level until May 2004.

The top state tax rate on income is 7 percent. Only about 15,000 Arkansas taxpayers have investment income of $200,000 a year or more, the people who might go out and get someone hired. About 12 percent of Arkansas tax filers claim some capital gains, but most are one-time gains from property sale or else negligible sums.

The tax savings from reducing the Arkansas capital gains rate, even for those with a quarter-million of profits, are not enough to drive hiring. The federal government recoups some of the savings because the taxpayer loses the deduction for state taxes.

The history of federal capital gains taxation is longer but no more supportive. The tax rate was raised in 1976 under President Gerald Ford and economic growth accelerated. President Jimmy Carter cut the top rate from 39 percent to 28 percent in 1978 and economic growth slowed. President Reagan's sweeping tax cuts in 1981 lowered the top capital gains rate again to 20 percent, which was followed by the deepest recession since the 1930s. Needing to rein in the growing deficit, Reagan restored the 28 percent rate on capital gains in the tax reform act of 1986 and the economy and hiring sharply expanded over the next two years.

Few people would argue that raising tax rates spur the economy and lowering them dampens it, but the historical record should tell us something. It is at least this: lowering taxes on high incomes is neither a cure for economic distress nor a palliative.

And, oh yes, the Bush tax cuts, which were to send the economy soaring and set off the greatest hiring rush in history. We know what happened. But what about specifically the capital gains cut of 2003, which was packaged with accelerated personal and corporate tax cuts and lowered the top capital gains rate to 15 percent? The economy continued to grow at a snail's pace and then fell off the cliff. In 2005, there were three months when more than 300,000 people were hired, but overall it was the U. S. economy's weakest job performance since the Depression.

But, hey, let's try it again.

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