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 Richmans' Trade and Taxes Blog



Solving the Capital Gains Riddle
Raymond Richman, 5/14/2015

Under the U.S. personal and corporate income tax codes, realized capital gains and losses are considered income. However, when calculating national income, capital gains and losses are excluded. Why the difference in treatment? No serious economist would argue that changes in the value of assets during a period should be added in calculating the national income for that period. Nor even that realized capital gains and losses should be added in calculating national income. Yet most appear to believe that realized capital gains at least should be counted as income for purposes of personal and corporate income taxation. Some argue that to exclude realized capital gains would be unfair to taxpayers whose income comes from other sources. In this view, even unrealized capital gains (referred to in the economic literature as accrued capital gains) are income but need to be excluded for administrative reasons, i.e., one should not be forced to sell some of his capital to pay the tax liability. Herein we argue that accrued capital gains are not income, that realized capital gains are income if they are consumed but not income if they are re-invested. 

There have been individuals, including some economists, who have contended that the measurement of the national income is defective because it fails to take into account social costs such as pollution, environmental degradation, and the destruction caused by natural and unnatural calamities. It doesn=t take into account costs or benefits that are not transacted in the market place. We know our income would be higher if each of us took in the other=s washing. While these critics tend to be biased since they overlook the social benefits such as increased health and product quality and choice, our difference with them concerns the concept of income implicit in their argument. Income isn=t welfare; it is a measure of the extent of the resources individuals, businesses and the nation can command. National income doesn=t pretend to be a perfect or even an imperfect measure of welfare. It is simply the best measure of economic power at our command and the growth or lack of growth of such power over time, from year to year.

There have been individuals, including some economists, who have contended that the measurement of the national income is defective because it fails to take into account social costs such as pollution, environmental degradation, and the destruction caused by natural and unnatural calamities. It doesn=t take into account costs or benefits that are not transacted in the market place. We know our income would be higher if each of us took in the other=s washing. While these critics tend to be biased since they overlook the social benefits such as increased health and product quality and choice, our difference with them concerns the concept of income implicit in their argument. Income isn=t welfare; it is a measure of the extent of the resources individuals, businesses and the nation can command. National income doesn=t pretend to be a perfect or even an imperfect measure of welfare. It is simply the best measure of economic power at our command and the growth or lack of growth of such power over time, from year to year.

 

There have been individuals, including some economists, who have contended that the measurement of the national income is defective because it fails to take into account social costs such as pollution, environmental degradation, and the destruction caused by natural and unnatural calamities. It doesn=t take into account costs or benefits that are not transacted in the market place. We know our income would be higher if each of us took in the other=s washing. While these critics tend to be biased since they overlook the social benefits such as increased health and product quality and choice, our difference with them concerns the concept of income implicit in their argument. Income isn=t welfare; it is a measure of the extent of the resources individuals, businesses and the nation can command. National income doesn=t pretend to be a perfect or even an imperfect measure of welfare. It is simply the best measure of economic power at our command and the growth or lack of growth of such power over time, from year to year. ...

 

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Do Low Capital Gains Taxes Spur Economic Growth?
Jesse Richman, 9/28/2012

Ezra Klein of the Washington Post recently posted an interesting piece oncapital gains taxation.  He reviews the empirical evidence that capital gains tax rates have influenced economic growth rates -- there isn't any -- and discusses the economic reasons why this is the case.  Basically his case is that the economic benefits of low capital gains tax rates are potentially counter-balanced by the economic distortions created by the incentive to reengineer other income into capital gains tax rates.  The article can be read at:

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/25/the-case-for-raising-taxes-on-capital-gains/

Klein does not discuss the economic case we have made that low capital gains tax rates also encourage the consumption of capital...

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Bloomberg spins falling Case Shiller numbers as a positive trend
Howard Richman, 4/24/2012

This morning, S&P/Case-Shiller released their data for February sales and resales of the same homes. Bloomberg News spins these numbers as a positive sign (Oil rises as Case-Shiller report shows improvement). Their story begins:

Oil rose in New York after home prices in 20 U.S. cities dropped at a slower pace in February, bolstering optimism that economic expansion will accelerate in the world’s biggest crude-consuming country.

Futures climbed as much as 1 percent after the S&P/Case-Shiller index of property values fell 3.5 percent from a year earlier, the smallest 12-month drop since February 2011. Crude also climbed as equities rose on better-than-estimated earnings. An Energy Department report tomorrow may show that supplies rose 2.65 million barrels, according to a Bloomberg survey.

“The housing numbers aren’t great but they have improved,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

The actual data is graphed below (after dividing by the CPI to subtract inflation):

CaseShillerThruFeb2012.gif

About 1 year ago, we wrote a commentary for the American Thinker called House Prices in Free Fall. We predicted that house prices would continue to fall. Specifically:...

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Dems and Republicans Should Get the Tax Treatment of Capital Gains Right
Raymond Richman, 3/6/2012

Republicans and Democrats in the House of Representatives and the Senate have little understanding of the nature of capital gains and losses and their appropriate treatment in a system that imposes a progressive individual income tax and a corporate income tax and in which proprietorships, partnerships and corporations are subject to different tax treatments. Republicans advocate zero tax on capital gains and believe that corporate dividends are subject to double taxation, once by the corporation and again by the personal income tax. They believe this justifies a zero tax on capital gains and little or no tax on dividends under the personal income tax. Here is a look at the current treatment of capital gains and what we recommend as the appropriate tax treatment.

From 2008 – 2012, long-term capital gains on assets held more than one year were taxed at a zero rate in 10 and 15% income brackets. Those in the 25-35% income tax brackets were taxed at 15%. Short-term capital gains (on assets held less than one year), were taxable at ordinary rates. Democrats argue for higher rates. The president proposed for 2013 a long-term rate of 10% instead of a zero rate in the two lowest income tax brackets and a 20% rate in the higher brackets. Capital losses offset capital gains and are limited to a deduction $3000. Republicans usually argue for a zero rate on capital gains.What is the appropriate treatment? ...

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Our capital gains commentary - House Prices in Free Fall - was published this morning by the American Thinker!
Howard Richman, 4/14/2011

Here is a selection:

In 1951, Congress, at the urging of President Truman, instituted the roll-over treatment for taxation of capital gains from home sales, an economically sound treatment of capital gains. As a result, from 1951 through 1997, whenever a homeowner sold his or her primary residence to buy another residence, the capital gains tax was deferred, not forgiven. In technical parlance the gain was rolled-over until the new home was sold. Homeowners would typically build up their equity in one home, sell that home, and then use their savings to make a down payment on a larger home. During that period, there were large changes in interest rates, yet real home prices were quite stable.

In 1997, a foolish Congress, at the urging of a foolish President Bill Clinton, eliminated the capital gain tax on homes sold by most homeowners. This change immediately stimulated the housing price bubble. It told speculators that the capital gain that they would earn would be tax free if they bought a house in the expectation of a rise in its market value and sold it at a higher price. Under the new provision, almost anyone who had lived in a house for 2 years of the past 5 years could sell the house free from capital gains tax. The new policy encouraged people to gamble on real estate. They saw that houses were going up in price year after year. What an easy way to make money!

To read it, go to: http://www.americanthinker.com/2011/04/house_prices_in_free_fall.html

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5.4% tax surcharge on rich in House Health Care Bill would apply to capital gains & dividends
Howard Richman, 1/6/2010

On November 12, the Wall Street Journal reported that the version of the Health Care bill that passed the House would result in a 69% hike in the capital gains tax rate because it would apply to adjusted gross income (which includes dividend and capital gains income) and would coincide with the capital gains rate automatically going up from 15% to 20% with the expiration of the Bush tax cuts in January 2011.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]