Kudlow: Don’t Tax Capital Gains at the Same Rate as Other Income

Lawrence Kudlow loves to dress up bogus arguments in some fancy ways. He begins with:

Democrats in Congress and on the presidential trail are intensifying their high-tax war against prosperity and the so-called rich. Their latest salvo includes more tax penalties on successful investors and entrepreneurs, such as a proposed 4.3 percent surtax on high-income earners and a tax assault on the private-equity buyout industry.

His opposition to this surtax is a plea not to return to the fiscally responsible period known as the 1990’s. Kudlow is arguing like Rudy G. that a return to the 1990’s wouldn’t be prudent. After all, they would rather pretend that growth rate in the 1990’s were dismal while growth under President Bush has been fantastic. Never mind that the facts say the reverse was true.

But here’s the fancy part:

Up to now, Blackstone’s authoring statement had envisioned some kind of two-tiered tax plan, where ordinary corporate compensation would be taxed at the 35 percent corporate rate while high-risk investment-fund profits would be taxed at the 15 percent cap-gains rate. And now, senators Max Baucus (D., Mon.) and Charles Grassley (R., Iowa) want Blackstone to pay the much higher corporate tax on all its income. Normal salaries and income from straight-out financial services arguably should be taxed at the corporate rate. But the investment partnerships inside Blackstone constitute risk-taking. For example, if the risks don’t pay off with profits, there is no income to be taxed. So, should the Baucus-Grassley plan set up a new multiple tax on capital, it would have negative consequences on economic growth while diminishing the economic clout for risk-taking. And this is just the start. The next step will be to raise the overall tax on private buyout partnerships, even though there’s no intent to go public. Former Clinton Treasury secretary Robert Rubin suggests more than doubling capital-gains taxes on these partnerships, telling a Washington conference that the lower rate on capital gains hasn’t contributed one iota to the economy.

Kudlow wants his readers to believe that increasing the tax rate on capital gains would treat this form of income different from other forms of income. But wait a second – if we double the current tax rate on capital gains, which is now only 15%, then the current disparity in tax rates would be reduced. Kudlow goes onto to hammer the Democratic Presidential candidates on their tax hike agenda as if we were currently running Federal surpluses. Never mind that the facts say we are running deficits.

Update: While Max Sawicky does not comment on Kudlow, he has links to a lot of the other discussions of this issue. Another tip of my hat to Max as he continues to stay far ahead of this Left Coast Bear on D.C. tax controversies!