Stephen Maseda | Doing the Homework on Taxes

Letters to the Editor
Letters to the Editor

I was preparing to respond to Mr. Jim de Bree’s (May 20) column arguing for an increase in the rate at which long-term capital gains are taxed (short-term capital gains are taxed as ordinary income), when I read his response to my letter concerning his argument for an increase in the corporate tax rate. 

Initially I would note that Mr. de Bree is apparently of the opinion that increasing taxes would be economically beneficial, although he fails in both columns to point out any reason why they would benefit our economy, indeed his entire premise seems to be that it would be “fairer” for corporations and wealthier individuals to pay more in taxes. 

Let’s start with corporate taxes. His letter disputes my comment that corporations do not pay taxes, rather they pass them on to customers, employees and shareholders in the form of increased prices, reduced wages and lower profits. In doing so, he refers to the tax reduction in the Tax Cuts and Jobs Act, asserting, without any actual support, that it did not result in an increase in employee compensation (which is not true, as shown later), but was paid to shareholders in the form of buybacks (he should have also included dividends, as any number of corporations paid increased dividends); and by asserting that businesses cannot pass on tax increases to customers because of the law of supply and demand, ignoring demand elasticity and the universality of the corporate income tax, and for that matter employment taxes.

By way of example, California recently raised its tax on gasoline. Does anyone, including Mr. de Bree, believe that gasoline retailers chose not to pass on this tax increase to consumers? Clearly, they did pass it on, and they were able to do so, largely free of the law of supply and demand, as any ecomomist, student or teacher will tell you because of the inelasticity of demand for gasoline — people need to buy gas and have very limited alternatives, and by the fact that all retailers were subject to the tax. While this example is not perfectly analogous to an increase in the corporate income tax, such a tax increase is universal, and everyone needs to buy goods and services. 

As for the concept that corporations cannot pass on income taxes: The Congressional Budget Office, the Congressional Joint Committee on Taxation, and the Tax Policy Center all believe, contrary to Mr. de Bree’s opinion, that they do, the only disagreement being in the amount at which these various groups bear the burden of the increase.

As for Mr. de Bree’s assertion about increased wages as a result of the TCJA, I would note that at least in part (the other being deregulation) the act resulted in historic lows in unemployment, which, consistent with the law of supply and demand, resulted in a substantial increase in median income. Mr. de Bree asserts that wages are set by supply and demand, thus lower unemployment equates into increased demand, causing an increase in compensation, and median income increased by over 8% in 2019 over 2018.

Now to the reason I started to write this letter: Mr. de Bree’s argument for increasing the capital gains tax. Long-term capital gains have always been taxed at lower rates than ordinary income (at least since the 1954 code). There are reasons for this. Long-term capital gains are increases in an asset’s value over time, and thus represent a non-guaranteed return on an investment, such that taxing the entire gain in the year of sale results in a tax on a gain, which accrued over more than one year, and in many cases several years, while ordinary income is determined and taxed yearly — the year it is earned. 

Given the different nature of capital gains, some portion of the gain will represent inflation, and thus is not an actual gain, while taxing the gain all in the year of sale fails to match the gain to the period of its creation. The lower rate of taxation is a crude attempt at addressing these issues. 

Finally, the concept that the wealthy should pay more tax ignores the fact that the top 10% of earners pay over 70% of income taxes. In 2020 the top 1% reported 21% of income and paid 38% of individual taxes. The top 50% pay 97% of all individual income taxes, while the remaining half pay 3%. 

So, I fail to see any justification for raising taxes, and Mr. de Bree does not give us one, other than a sense of “fairness.” Where I grew up we had a saying: “Fairness depends on whose bull’s being gored.”

We are not going to tax ourselves out of this debt mess we (both political parties) have created, and we are on the verge of becoming Japan, where the effects will be unpleasant and intractable. 

Stephen Maseda


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