Best of @RichardAEpstein @HooverInst. Schumer cannot answer the Trump tax reform.

Nov 04, 05:02 AM

Cartoon: Another Hold Up! (Mayor Busse demanding new, huge bond issue from the Chicago tax payer)

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Schumer cannot answer the Trump tax reform. @RichardAEpstein @HooverIns

"…The second major flaw in Schumer’s tax-giveaway argument is that it assumes the current rates of relative taxation are correct, no matter how steep the current ones skew. That argument thus introduces a ratchet effect, in which all tax increases on the rich are lauded, and any tax cuts in their favor are denounced, notwithstanding the general success of the Kennedy and Reagan cuts. Overtaxation of the rich, on this view, becomes a contradiction in terms. The 2001 round of Bush II tax cuts did little good because they were phased in too slowly. The 2003 round, cutting capital gains, did far better. The correct analysis does not sanctify the status quo ante, but looks to define some independent normative baseline. I have long believed that a flat tax with a single bracket is the most socially advantageous. It eases tax administrative costs. It reduces the impulse for well-heeled people to split wealth among and within families through complex trust, partnership, and corporate arrangements. It reduces political intrigue by making it difficult for interest groups to stick their opponents with heavy taxes, like the ill-conceived special taxes on capital gains and medical devices used to fund Obamacare. And it imposes constant political pressure on Congress to lower overall expenditure rates, now that no one is exempt from taxes. In this regard, the Trump proposal, with three separate brackets, does not go far enough. Likewise, there is a case for removing, not lowering, capital gains taxes. The capital gains tax slows down the shift in wealth from less to more productive uses. Set the capital gains rate at 20 percent, and any new investment of the gains has to receive a 25 percent higher return than the existing investment to produce the same after-tax return. Thus if the current $100 investment yields 10 percent, the new $80 investment has to yield, net of transaction costs, 25 percent more—12.5 percent. Only then does the taxpayer get the same rate of return (0.1 x 10- = 0.125 x 8)—for the switch to make sense. At the very least, a better strategy is to allow a person to escape capital gains taxes by reinvesting the gains from the earlier transaction in the market. The increase in dividends and wages should go a long way to offset the losses…."