Think Again: ‘As Ronald Reagan Said... Oh Never Mind’ by Eric Alterman | Center for American Progress

Conservative media outlets are falling all over themselves looking for the “true” heir to Ronald Reagan. (For a telling example see here.) But one area in which pretty much all conservatives today are completely off base when it comes to Reaganism is capital-gains taxation.

Take David Frum, who has developed a reputation of late as being among the most thoughtful of prominent conservative commentators. He has twice recently made the conservative case for minimal capital-gains taxation here and here. In doing so, he defends a position held by virtually every conservative (and would-be Reaganite) in America.

Thing is, Ronald Reagan actually raised capital-gains taxes.

As The New York Times’ Floyd Norris notes,

For most of the history of income taxes in America, long-term capital gains — defined at different times as investments held for minimum periods of as little as six months and as long as 10 years — have been taxed at substantially lower rates than top ordinary income tax rates. But there was, in fact, only one time that capital gains were taxed at the same rates that were paid by people who earned their money by working. That was during the years 1988 to 1990, as a result of the Tax Reform Act of 1986 — a law championed by President Ronald Reagan.

This constituted a 30-percent increase in their tax rate at the time. There were good reasons for this, though one is hard-pressed to argue that Reagan knew what they were at the time. For instance, as Greg Anrig notes (care of a recent column by Paul Krugman):

The tax-favored treatment of capital gains is a notorious source of complexity in the tax code, diverting the energies of highly paid accountants and lawyers into wasteful efforts to shelter the incomes of wealthy clients from taxes. The elaborate tax forms known as Schedule D (“Capital Gains and Losses”) and Form 8949 (“Sales and Other Dispositions of Capital Assets”) provide a superficial glimpse at how the differential tax treatment of capital gains can suck up enormous quantities of time and money for the well-heeled and their tax pros. But much more costly and wasteful than the tedious forms are the strategic energies engaged in manipulating income flowing to the wealthy in ways that minimize tax liabilities.

Anrig cites a study by the Internal Revenue Service that finds “the primary source of capital gains income has shifted from stocks to ‘pass-through’ entities (gains on assets sold by partnerships, S-corporations, and estates and trusts),” a development that significantly benefits money managers who oversee private-equity partnerships. But while these efforts have demanded “an enormous investment of brainpower, administrative work, and other energy that has profited individuals engaged in those activities,” there has been no “discernable payoff to the rest of society. Little of that unproductive work would continue if capital gains were taxed at the same rates as earnings from work.”

One undeniable effect of the low rate for capital gains has been a vast acceleration of the “Hood Robin” legislative process, whereby lobbyists compel Congress to take from the poor and the middle class and give to the rich. “Wall Street loves the preferential capital gains rate. All of America’s 20- or 30 million wealthy small investors love capital gains rates,” economist Marty Sullivan explained to two Washington Post writers. “It’s just a tremendously popular item with political contributors. It’s something that directly impacts every wealthy household in America.”

Far from benefitting most citizens, Jacob Hacker, political science professor at Yale University and co-author of Winner-Take-All Politics, notes that “Capital gains taxes [are] actually pretty foreign to the experience of most voters.” He added, “These are things that are only a concern for those who itemize [their tax returns], which most Americans don’t,” but “members of Congress themselves, particularly senators, are well off and they’re more likely to be sympathetic to the argument for low capital gains.”

And as Forbes editor Robert Lenzner writes, the richest 0.1 percent of Americans earns half of all capital gains:

Income and wealth disparities become even more absurd if we look at the top 0.1 percent of the nation’s earners — rather than the more common 1 percent. The top 0.1 percent — about 315,000 individuals out of 315 million — are making about half of all capital gains on the sale of shares or property after one year; and these capital gains make up 60 percent of the income made by the Forbes 400.

Now one might argue that all of this could somehow be justified if a lower capital gains rate lifted all boats. After all, many, if not most, Americans are OK with the rich getting richer — as long as the rest of us do too.

Perhaps some conservatives will argue that “history shows” this, but they wouldn’t be talking about U.S. history. Again, Greg Anrig writes:

Advocates of the capital gains tax break have claimed for decades that the exclusion benefits the economy and all workers by encouraging higher levels of investment and savings, which in turn promote growth and prosperity. But researchers have never been able to demonstrate that such connections actually exist. Capital gains tax rates have gone up and down over the years with little apparent relation to economic performance, aside from fleeting effects on realization of capital gains when rates change.

Warren Buffett concurs, explaining from personal experience that he has “worked with investors for 60 years and [has] 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.”

Furthermore, The Washington Post’s Ezra Klein notes that a study by Troy Kravitz and Len Burman of the Urban Institute finds that over the previous half century there has been zero “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.”

Conservatives used to argue for the value of hard work above all. But The New York Times’ Norris reminds us that what we now call “capital gains” and “carried interest” used to be more accurately termed “unearned income.” He adds, “It does seem odd that those who work for their money generally pay higher tax rates than those who simply collect investment income.”

Odd indeed, but no odder, one supposes, than allowing our political system to be, as Nobel laureate Joseph Stiglitz argues, “Of the 1 percent, by the 1 percent, [and] for the 1 percent.” After all, as any good conservative, even Ronald Reagan, could have told you: In politics, as in life, you get what you pay for.

Eric Alterman is a Senior Fellow at the Center for American Progress and a Distinguished Professor of English at Brooklyn College and the CUNY Graduate School of Journalism. He is also a columnist for The Nation, The Forward, and The Daily Beast. His newest book is Kabuki Democracy: The System vs. Barack Obama. This column won the 2011 Mirror Award for Best Digital Commentary.