The Specific Demand Occupy Wall Street Should Be Making: Raise the Capital Gains Tax

Maybe it's time to revise this sign. Photo: David Shankbone's flickr

Go down to Zuccotti Park and you’ll see a lot of signs protesting rising inequality, unchecked corporate influence on politics, and hardship for the masses. But you won’t see many signs requesting specific solutions to these problems. The only one I spied on my visit was a day tripper: a neatly dressed college student from New Jersey standing at the edge of the crowd, calling for reinstatement of Glass–Steagall, a law that would stop big commercial banks from trading in stocks as investment banks do.

The protesters do have goals — greater income equality and limitations on the political favoritism financial titans enjoy — but they haven’t formulated how they think these could or should be accomplished. They wisely chose not to get overly specific at the beginning of the movement, so that it would have room to grow. And grow it has, to cities all over the world. But you can’t just raise consciousness forever. Just as the tea party started out with a general sense of anger at the federal government and blossomed into a force in electoral politics, Occupy Wall Street needs to eventually turn its energy to making actual changes to the status quo it decries.

Many commentators on the right have used this lack of proposals as a reason to dismiss the protests as pointless, ignorant, and irresponsible. Some pundits on the left have stepped into the breach with various wonkish ideas to regulate Wall Street. But perhaps the most obvious idea has thus far been overlooked: taxing all capital gains as regular income.

Historically, the rate of taxation on capital gains — that is, any profit made from selling an investment such as a stock, bond, or house — has varied dramatically over the years. A brief period from 1922–1933 aside, it has always been higher than the current rate of 15 percent. The bipartisan tax reform of 1986 treated capital gains as income, but capital gains taxes were separated from income and successively lowered in 1990, 1993, 1997, and 2003, as part of the second batch of Bush tax cuts scheduled to expire in 2013. Both parties have participated, although low capital gains taxes are much more of an ideological fixation among conservatives.

The fact that all capital gains are taxed at only 15 percent while income can be taxed as high as 36 percent is the reason hedge fund and private equity managers pay lower taxes on their income — technically earned as “carried interest,” a form of capital gains — than their secretaries, as Warren Buffett famously put it. It’s the reason, as this chart from the Center for American Progress demonstrates, that the effective tax rate for the wealthiest 400 families in the country is lower than for the average household making between $74,700–$102,900 per year. Matt Taibbi of Rolling Stone and Gary Weiss of The Street suggest eliminating the carried interest exemption, but why stop there? Hedge-funders are no less deserving of favorable treatment than heirs to fortunes who live off capital gains. Why should CEOs pay lower taxes on their stock options than their employees pay on their salaries?

The argument, advanced by Wall Street and right-wing anti-tax zealots, is that low capital gains taxes induce investment. But it’s false. As a 2005 study by the non-partisan Tax Policy Center showed, capital gains tax rates have historically had only marginal impact on the stock market and no impact on economic growth. A 2010 study by the non-partisan Congressional Research Service had equally damning findings: Low capital gains taxes reduce government revenue, disproportionately benefit the wealthy, and do not boost economic growth.

Conservatives such as Grover Norquist of Americans for Tax Reform are lying when they say, as Norquist recently did, “Every time we’ve cut the capital gains tax, the economy has grown. Whenever we raise the capital gains tax, it’s been damaged.” The low capital gains tax rate during the first four years of the Great Depression apparently did nothing to get the economy going, nor did raising it to 30 percent in 1938 prevent the economy from recovering. And the economy grew steadily from 1951 to 1964 with a capital gains tax rate of 25 percent. But the belief that cutting taxes encourages economic activity, leads to growth and ultimately more government revenues is a theological commitment among today’s conservatives. If the tax rate were, say, 90 percent, then maybe people would be discouraged from working those extra hours. But decades of evidence and mountains of research show that when you’re talking about tax rates lower than 50 or 60 percent, the conservative view is unsubstantiated.

George W. Bush’s regressive tax reductions led to bigger deficits than during the Clinton years. Was the trade-off that the economy grew more? No, and those three trends Bush started — higher deficits, lower growth and greater inequality — are much of what Occupy Wall Street is so upset about.

People will invest if they think there’s a profit to be made. As The New York Times reported in August, “even some hedge fund and private equity officials concede that the argument for lower capital gains rates rests more on faith than science.” So let’s put it to an empirical test.

Treating capital gains as income should be emotionally satisfying to the Occupy Wall Street protesters. Democrats in Washington propose a tiny increase in taxes on the incomes of top earners, which would hit cardiologists along with stock brokers, but higher taxes on capital gains would come from CEOs who cut jobs and cash in big stock options, the idle rich who live off their stock portfolios, and professional gamblers on Wall Street. Of course, it seems politically unfeasible at the moment: Republicans refuse to raise tax revenue from any source, while Democrats try to compete for the affections and donations of Wall Street. But the purpose of Occupy Wall Street is to change what is politically possible, and this would be a good way to do it.