Can we agree that taxes distort behavior? If you're prepared to spend $10,000 to buy a car and that $10,000 car, which you actually believe is worth $10,000 but not $10,050, now costs you $11,500 with taxes, then you're not going to buy that car.
Originally Posted by Joby
Well taxes also distort capital allocation decisions. If you're faced with a higher capital gains tax, then you're more inclined to keep your investment capital in place, with unrealized capital gains, even if a slightly better alternative investment is available, because to free up the cash to invest in the alternative you have to cash out your investment and pay the capital gains tax. The higher the tax the more reluctant you become to switch out.
What this all means is that investment is misallocated. The best uses for capital are not funded. This translates into economic inefficiency. Taxes distort behavior.
The question for liberals is this - Do you want the government to have more tax money to spend or do you want more "fairness" even at the cost of less tax money to spend?
Here's President Obama being questioned on this issue:
GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent.
But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.
GIBSON: And George Bush has taken it down to 15 percent.
GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.
So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?
OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness.