Taxes on Income, Red and Green

Prof. Landsburg recently posted a draft of his contribution to a FestschriftThe reader is urged to read the whole thing because, quite apart from the subject of this post, it has much news even for some who fancy themselves well-informed on the subject. For example, the author, while a reader and admirer of both McCloskey and the Greats of the Chicago School, had not known that he (as she then was) had been such a prominent and electrifying figure in it. for Prof. McCloskey:

Journalists—even bright and thoughtful journalists like Michael Kinsley—frequently justify the taxation of capital income with an appeal to the principle that everything ought to be taxed equally.

…

The notion of a general principle that everything should be taxed equally is pure blather, of exactly the sort that McCloskey warned us against at every turn. And if there were such a principle, it would still be incumbent on us to figure out exactly what the principle entails before jumping to any conclusions.

Of Marriage, Taxes, and Punching

Imagine a genie were to appear before you and offer a deal along the following lines:

If you accept this one-time offer, you will never have to pay income taxes at a marginal rate above that of the median tax-payer. Even if you earned millions and lived in a high-tax jurisdiction, like New York city or California, your total marginal income tax rate will remain at about the 10% the median tax-payer pays, rather than the 50% or 60% you might have to pay under current law in these jurisdictions.

But this deal also has a down-side: You will never be allowed to marry. Sure, you will still be free to cohabit with any person of your choice, procreate, raise off-spring together, and make any contractual arrangements that seem suitable to you and your partner. You, your friends, and others (such as your church) would even be free to call such an arrangement marriage. But the government never will.

How to Eliminate the Capital Gain Deferral Distortion

And now for the thrilling conclusion of the blockbuster series of posts on the capital gain tax deferral distortion! We have seen how it arises, how some common-sense fixes cannot work, how bond taxation addresses it imperfectly, and how it can be exploited to shield even current investment returns from taxation.

More Fun With Capital Gains Tax Deferral

Recent posts have described how capital gains tax deferral allows investors to reduce their effective tax rate asymptotically to zero, how this distorts investment decisions, how market-to-market cannot fix the problem, and how bond taxation partially deals with the problem. Before the eagerly anticipated revelation how the tax code could fix this distortion to come in a future post, let me describe another method by which this deviation can be further exploited.

How Bond Taxation Addresses the Deferral Distortion

A previous post discussed the economic distortion caused by deferral of capital gains tax, another, why market-to-market cannot fix this distortion. This post shows how the tax code tries, but does not entirely succeed, in addressing this issue with regard to bonds.

Mandatory Mark-to-Market Cannot Fix Capital Gains Tax Deferral Distortion

A previous post discussed the issue of the deferral of capital gains tax and why, if there is going to be a capital gains tax, this deferral distorts economic decision-making. The issue of this post is whether mandatory mark-to-market taxation can fix the problem.

How to Cut Taxes When Congress Won't

Imagine a 2017 with a newly sworn-in President Paul (or Cruz), but a Congress no more and perhaps less conservative than the current one.

The President announces as one of his main legislative priorities a comprehensive reform of the tax system, including reducing the top marginal individual federal income tax rate from the current 44% or so to 25%. However, after extensive debates accompanied by great acrimony and perhaps a filibuster or two, Congress refuses to enact the President's tax reform.

Economic Distortion of Capital Gains Tax Deferral

One under-appreciated feature of capital gains taxation are the substantial implicit benefits of deferral—capital gains are only taxed once they are realized (i.e., generally when the investment is cashed out), not when in any economic sense they are earned. Effectively, deferral renders any sufficiently long-term capital gain tax-free, regardless of what the statutory rate is.

To understand this counter-intuitive—after all, aren't long-term gain still taxed before you can ever get the cash?— conclusion, consider the following hypothetical:

Eliminating the Mortgage Interest Deduction Would Not Make the Tax Code Fairer

One frequent point made by free-market types, such as myself, is that the tax code's many preferences and deductions make the tax code distortionary and result in unnecessarily high marginal rates. The prime example cited is always the mortgage interest deduction which is said to favor the well-to-do and cause house prices to rise too high. While the general principle is sound, abolishing the mortgage interest deduction is not necessarily a step in the right direction.¹

Thank You, Citibank and Uncle Sam!

I live in a pleasant 9,000 sq ft, 8 bedroom house in Northern Virginia, about 10 miles from the White House and my work. Recently I refinanced the mortgage on this house. Let's look at the economic implications.

The Tax Expenditure Which Dares Not Speak Its Name

One topic of frequent exhortation on taxes among progressive policy wonkeries, such as the Tax Policy Center, are tax expenditures, or internal revenue code provisions which reduce tax revenues below what they would otherwise be.