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Reagan’s Tax Fairness Surprise
Congress should restore The Gipper's progressive capital gains tax
by Gerald E. Scorse
The Tax Reform Act of 1986 was President Ronald Reagan’s last fiscal legacy. On the one hand, it showcased his deep belief in trickle-down economics, cutting the top rate on personal income nearly in half.
But on the other hand, Reagan also signed off on a longtime liberal goal: equal taxes on income from work and income from wealth. The bill raised the tax on long-term capital gains from 20 percent to 28 percent, the same top rate that applied to ordinary income. And at least for some years, gains made on Wall Street were taxed at the same rate as wages on Main Street.
Reagan hailed the bill as “a sweeping victory for fairness.” A generation later, our runaway federal deficit gives President Obama powerful new grounds to bring back Reagan’s liberal breakthrough.
The president knows we’ve been backsliding for the longest time. Listen to this from the Tax Fairness Plan posted on Obama’s website in 2008: “For decades, America has been victim to an anti-tax sentiment that has led to tax cuts that favor wealth, not work.”
Nothing favors wealth, not work, more neatly than the tax break on capital gains. President Clinton lowered the tax on long-term gains to 20 percent. President Bush cut it again, to 15 percent, little more than half the rate paid by middle-class Americans on their wages. Bush’s action pushed the rate to a 70-year low; it’s now at 77 years and counting, going back to 1933.
The Bush tax cuts are due to expire at the end of the year, which would return the capital gains rate to 20 percent. Instead, taking his fairness cue from Reagan, the president should shepherd us back to the equal-tax path.
You can see how Reagan got there by looking at the reason that’s always given for low capital gains taxes—the claim that buying stocks stimulates the economy, growing new businesses and new jobs. Nice try, but The Gipper saw through it.
Only a trace amount of all the churning on Wall Street grows anything. Small companies with big dreams raise seed money through initial public offerings (IPOs) and secondary offerings. These investments deserve a bigger tax break than they get now; there’s a strong case for making them tax-free. All other stock market gains should be taxed the same as wages (which they were, back when).
Finally, we can’t keep adding red ink. The US deficit hit a record $1.4 trillion for fiscal 2009, and Obama just announced a 2010 budget with an even bigger deficit. Sooner or later, with much handwringing on the Beltway, Congress will be forced to mete out the pain.
Tax breaks on Wall Street gains (except as noted) fail three fiscal policy tests. They serve no purpose. They’re a limitless drain on the Treasury. And they’re inequitable: they favor wealth, not work. Income is income, and should be taxed the same no matter where it comes from.
“A sweeping victory for fairness”—Ronald Reagan, October 22, 1986, at a signing ceremony on the south lawn of the White House. Barack Obama? I’m leaving a message, and hoping to hear from him.
Copyright 2010 Gerald E. Scorse. Gerald E. Scorse helped pass a bill that tightens the rules for reporting capital gains*. He has an MBA from Baruch College.
*”The basis reporting legislation follows years of hard work by Prof. Jay Soled of Rutgers University, Prof. Joseph M. Dodge of Florida State University, and more recently… Gerald E. Scorse, who read about the work of the two professors and decided to make this reform his cause.” – Excerpt from David Cay Johnston’s Tax Notes column of 10/13/2008. ◆
Besides, bottled soda is taxed; and bottled sparkling water is taxed even if it contains real juice. So why not plain bottled water (some of which is nothing but tap water anyway). Don't be so stuffy. If you have to drink water from a bottle, then put your money where your mouth is.