I was listening to a short piece on NPR the other night that discussed tax laws. The claim was that “If conservatives had their way, they would only tax consumption. If liberals had their way, they would only tax savings.”
It didn’t quite seem right, but it left an impression. My understanding of tax law history is that taxes in the early 20th century were very progressive. Before WWII, income was only taxed for the very wealthy. Middle and lower classes paid NO income tax. War-time came and people were willing to pony up to support the effort, and the tax was never repealed.
Capital gains taxes are a similar story. Before the 1970s, capital gains were taxed at some ridiculous rate, somewhere between 70-90%. Since then, they’ve steadily decreased to their current rate today, where long term gains are taxed at 10 or 15% and short-term gains are taxed at your marginal tax rate.
So to hear that conservatives want sales taxes instead of capital gains taxes, it sounded about right to me. It ignores the question of why income taxes are getting more regressive, but that’s another issue.
After reading this letter by John C. Bogle, the founder and CEO of Vanguard, I realize why this idea is so unsettling to me. Capital gains taxes are not a tax on SAVINGS. They are a tax on PROFIT on somebody’s excess money. You can invest in companies by buying stock and that investment is 100% tax-free. It’s when you sell that investment (to spend or re-invest) that it’s taxed.
It is not the tax code that needs changing; it is the “short-termism†exhibited by the vast majority of mutual fund managers, and the short-sightedness of mutual fund shareholders who refuse, out of naiveté or even ignorance, to look after their own economic interests.
I know that he’s not talking about capital gains in general but a more obscure provision regarding the taxation of transactions in a mutual fund holding, but no doubt the same principles apply.
Thanks to JLP at AllFinancialMatters for the link to Bogle’s blog.
Tags: Tax Law
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