How to Tax Capital Gains

How to Tax Capital Gains - WSJ.com

Since the important work by Martin Feldstein and his collaborators in the 1970s, economists have understood that taxing capital gains has a big impact on investors' decisions about when to sell capital assets. Higher tax rates delay sales, causing investors to be "locked in" to their current holdings, unable to balance their portfolios as they would wish. Although more recent research has shown that increases or decreases in the sale of assets are largely timing responses triggered by changes in tax rates rather than permanent shifts in behavior, we must take the lock-in effect seriously, because in fact tax rates are constantly changing. By itself, an increase in the capital gains tax rate worsens the lock-in effect. But this impact can be offset by other desirable changes, such as indexing capital gains for inflation (which would lower the share of capital gains subject to tax) and taxing capital gains at death. (Currently, we do not collect capital gains taxes when someone dies; this makes people want to hold onto appreciated assets throughout their lifetimes.) So-called "constructive realization" (i.e., taxation of capital gains at death) could help solve our current estate tax impasse by substituting capital gains revenues for some of the lost estate taxes. Canada has implemented constructive realization, and dropped estate and inheritance taxation.

I write about this because it seems like some sort of legislation is inevitable given the 2010 expiration of Bush's tax cuts. But it does seem that all of washington is mired in such low approval ratings that no action is possible right now.

Get ready to update your bookmarks

Yes, it's true: I've left The Economist and am moving to The Atlantic, where this blog will live.

Mark Kleiman asks if Rudi wanted the city's disaster recovery command center in 7 WTC because it was a love shack for him and his girlfriend:

But just why was it so essential that the command center be within walking distance of City Hall? Here's Barrett:

The mayor was so personally focused on the siting and construction of the bunker that the city administrator who oversaw it testified in a subsequent lawsuit that "very senior officials," specifically including Giuliani, "were involved," which he said was a major difference between this and other projects. Giuliani's office had a humidor for cigars and mementos from City Hall, including a fire horn, police hats and fire hats, as well as monogrammed towels in his bathroom. His suite was bulletproofed and he visited it often, even on weekends, bringing his girlfriend Judi Nathan there long before the relationship surfaced.

Giuliani so far has displayed an astonishing amount of Teflon. But if it comes out that he did his emergency planning with his little head instead of his big head, even Republican primary voters might get a little bit upset.

Call me crazy, but the more parsimonious explanation seems like . . . you might want the city's staff to be able to get there quickly in the event of an emergency. As anyone who was in New York on 9/11 can attest, unless you could walk, you didn't get anywhere quickly; traffic was an evil snarl (and much worse downtown, where, at least when I was at the site, the collapse had snafued things like traffic signals and telephone trunk lines).

Plus, the gossip I've heard indicates that Giuliani had a perfectly acceptable love nest for his girlfriend, in the form of her apartment, and the city's many fine luxury hotels. I won't say that they didn't have sex in that bunker, but I sincerely doubt it was constructed for that purpose.

This morning I saw that Paul Krugman had written a column on the little difficulties we're currently having with our financial markets. And I thought, before I even opened it "You know, I bet that somehow, some way, this is the fault of the Bush administration." I wasn't sure that Mr Krugman would actually accuse George Bush of sneaking out of the White House at night to suck liquidity from the markets using his rich friends' ridiculously expensive Miele vacuum cleaners. But I was sure it would be something.

Ta-daa! You should worry about the crisis because, that's right, the Bush administration will muck it up.

Yesterday, President Bush, showing off his M.B.A. vocabulary, similarly tried to reassure the markets. But Mr. Bush is, let’s say, a bit lacking in credibility. On the other hand, it’s not clear that anyone could do the trick: right now we’re suffering from a serious shortage of saviors. And that’s too bad, because we might need one.

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But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.

There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis if the standard policies don’t work. But for a variety of reasons, not least the current administration’s record of incompetence, we’d really rather not go there.

Let’s hope, then, that this crisis blows over as quickly as that of 1998. But I wouldn’t count on it.

It's actually a pretty good column, explaining why liquidity traps are bad . . . though readers should keep in mind that Mr Krugman has something of a mania on the topic of liquidity. And certainly, I'd be the last person to claim the Uncle George's less-than-stentorian pronouncements are likely to reassure anyone about the future, given his past track record. But this is also a pretty nasty slur on Ben Bernanke and Hank Paulson, both of him are very, very good at their jobs. Bush's prior Treasury secretaries haven't been anything much to write home about, but Paulson is different--and, it might be noted, had the same job that Bob Rubin held before he got The Call. In both cases, the former head of a major investment bank is a pretty good guy to have in place when financial markets go sour--and given Mr Paulson's past track record, there's no reason to think that he is any less capable of handling this crisis than Mr Rubin was of handling the much, much smaller problem posed by LTCM.

That doesn't mean he will save us; the situation may not be salvageable. And having major economics columnists casting completely unfounded aspersions on the competence of the Treasury Secretary, just so that he can get in one more dig at his nemesis, probably isn't helping much.

Moving hell

I've reached that delightful point in my move where enough stuff is now out of boxes that it looks worse than it did when I first moved in. Moreover, my vases, candlesticks and assorted tchotchkes have displayed a remarkable capacity for breeding in captivity. I can't move my furniture until the boxes are out of the way, and if I unload the boxes to get them out of the way, then where is all the glass fruit to go?

This is all made much, much better by the fact that I need things like bathroom storage containers (I have no vanity). However, the big box retailers, which are located outside of the district. Normally, I would just rent a zipcar. However, on move day, while I was in the parking lot of Target, a delightful older gentleman, aged about 86, plowed into the side of my Zipcar as I was turning. His explanation:

I thought you were going to go straight.

I had assumed that by the age of eighty-six, most people had learned that when the car ahead of you puts its turn signal on, they are doing so with the intention, not of going straight, but of, well, turning. But perhaps they hadn't been invented when he learned to drive.

Did I mention that he has apparently gotten into parking lot accidents twice before?

Meanwhile, Zipcar has suspended my account pending the accident investigation. This would normally be a minor inconvenience, but right now, it's a MAJOR hassle. Mr [Name Withheld] was very lucky he wasn't within shouting distance when I realised that I would not be able to get to Target today.

Also, I have forgotten assorted vital things like pillows at my sister's place in Silver Spring--a place I cannot get to because, as we just discussed, I have no car. Or rather, I can get to it, but since I won't be able to carry more than a few things at a time, it's rather like trying to empty the ocean with a teaspoon.

And Comcast is refusing to hook up my cable because the previous occupant hasn't disconnected it. Their office is, needless to say, thoroughly inconveniently located for one without a car.

On the plus side, my new pad is cool, and the air conditioning works.

All of which is to say, bear with me if posting is light and/or consists largely of complaints about drill bits and Ikea furniture.

Greatest hitter ever?

I'm not sure about this controversy over Barry Bonds. Yes, the guy 'roided it up. But then so, I imagine, did the pitchers he faced, which should have made their pitches faster and harder to hit. This kind of grumbling seems odd in team sports, when everyone with a chemical or training advantage should see it offset by the same behaviour on the opposing team.

Brian Beutler is on firmer ground when he talks about changes to things like the ball and the height of the mound. But this is true of almost every sport. Running records are certainly better now because of steroids (it's kinda hard not to notice that every time the authorities develop a new test for a major drug, times collapse and no one breaks any records for a while), but also because of things like faster tracks and shoes and aerodynamic running clothing. And AFAIK, many of those changes were made before the steroid era, but no one wants to strip records from that earlier generation of players.

The emerging democratic majority?

Ezra Klein celebrates. I'm not so sure. It seems to me that the Democrats would have a near-permanent majority now . . . if only those ungrateful Irish, Italians, and Poles hadn't grown increasingly willing to vote Republican. Ethnic groups do switch parties, which is a good thing for the Democrats, because otherwise the larger of their two most solid ethnic constituencies would have long ago given the Republicans a permanent ruling majority.

Of course, the immigration debate may not help the Republicans among hispanics, but the iron law of politics is that when one of the parties cannot win without shifting policy positions, they eventually move. And it's not clear to me that either party is gaining from the current debate.

Julian has a good post on the eugenics debate:

But leaving that aside, it's important to recognize that the "eugenic" tag is supposed to constitute an independent reason to be hostile to abortion. If we all agree abortion is murder, then whether it has any eugenic aspects is almost ludicrously beside the point: The problem is it's murder. The point of invoking eugenics is to establish something else questionable about this practice, given moral disagreement about whether it constitutes murder. (Even for those who think it does, that it's "eugenic" is supposed to make it especially bad.) This is why Ross keeps linking things like this Michael Sandel essay, which attacks the goal of "perfecting" human beings, whether or not it entails any coercion.

I think, though, that part of the problem with these debates is that they're usually held by people like Ross and Julian, who embody fairly extreme opposite ends of the spectrum of beliefs about fetal life & rights. But they're warring for the hearts and minds of people like me, who are a lot fuzzier.

My thoughts are a little ragged here, but here goes: most people are against aborting healthy fetuses. Most people are in favour of aborting fetuses that have certain kinds of birth defects, primarily those that affect the head, nervous system and brain, or impose early fatality. That's because most people don't think of the cognitively disabled as fully human. Most people don't care as much about what happens to the retarded as they do about what happens to cognitively normal people.

Ross wants them to think of those people, or potential people, as fully human. That's the eugenics thing: there is a group of people who aren't really people, so it's okay to make them not happen.

This is completely irrelevant to the abortion debate as it happens on policy blogs, because Julian would happily let you abort a fetus because it might never learn to play the piano, while Ross wouldn't let you abort it if it were going to die three seconds after birth. I mean, if they were in charge, which they're not.

So Ross is having a debate with the pro-choice intellectual establishment, who aren't eugenicists; they've put all fetuses, healthy or no, into the class of "not people", so eugenics is beside the point. But it seems to me that he may really be aiming at the fuzzy, unintellectual people like me who make these decisions in a haze of half-explored intuitions. And who may be, in some large number, sharing an intuition that drove the eugenics movement, which is that some kind of disabilities render a creature with homo sapiens genes less than full "people". At least, until they are born, at which point evolutionary psychology and the cultural legacy of the Catholic Church's very successful crusade against infanticide keep us from getting rid of them.

No, I have not been sacked

Getting sacked is not festive. And my last post specifically mentioned that there would be festivities.

But thanks to everyone who emailed for their concern. I love you all.

If I know you, and haven't returned your email . . .

Between moving, travel, and some chaos in my work life that those who know me already know about, and the rest of you will discover shortly, I'm kinda swamped.

However, as of next week, I'll be bumming around DC, learning how the other half--the unemployed half*--lives. Then, blogging, emailing, and festivities. And if you're in DC, and want to have a drink or a coffee or something, I'm very open.

* Okay, 4.5%. Or, if you get all grumpy and want to look at labour force participation rates, ca. 40%. Whatever, dude; I'm a lady of leisure now.

Matt Zeitlin objects to the notion that first ladies should be seen and not heard:

So it’s OK for a president to hire White House staff and political and policy advisers, like, say Karl Rove, but Bill had his accomplished, competent, engaged, intelligent wife serve in an advisory position, it’s some sort of impropriety? I don’t know, maybe the president has some sort of special relationship with his spouse that allows for greater trust, confidence and forthright communication between the two of them. But I guess Noonan just wants first ladies to spend their days smoking cigarettes and reading novels. My blog persona may be harsh on Hillary, but the way she manages to drive right wingers absolutely nuts is rather satisfying.

Why are voters so uncomfortable with forward first spouses? I don't think it's pure sexism; the ones who hate Hilary mostly liked Condi all right, and frankly, if we do elect Hillary, I'm not sure I think Bill should be wandering around the White House making policy.

No, it seems to me that there's an obvious set of differences between spouses and policy advisors: spouses aren't picked for their policy expertise, and if they screw up, they can't be fired. Moreover, one might rightly fear that their ideas would get extra weight because the president doesn't want to sleep on the couch for the next three and a half years.

First ladies have obviously always had some sort of advisory role, because people talk to their spouses. But I don't think it's crazy to want to keep them at arm's length from the administration's major policy initiatives.

I would like to read TNR's Beauchamp dossier. But the fact is that I just now got home after spending 6+ hours on a train back from New York, over three of them stalled without air conditioning. Plus I moved yesterday. All this has made me too tired to read it. So upon the word of several people I trust who apparently have, I now declare that I was in error.

I don't think this is right. Current progressive support for aborting babies with congenital birth defects has very little in common with the philosophic basis for eugenics; the progressives aren't trying to clean up the gene pool. Rather, they're expressing support for a certain sort of personal autonomy--the right not to have a child that would be a massive burden. It's an autonomy of which I believe Ross also disapproves, but it seems fundamentally different from the arguments about eliminating those people for the good of society, which is what the old progressives were advocating.

His opponents go too far--the eugenicists were not just interested in cleaning up the gene pool for future generations; in many places, particularly in Europe, they also started knocking off the defectives. They were bothered, not just by the fact that these people might reproduce, but also the burden they placed on resources that they thought could be better employed--and also, one suspects, by the common human revulsion against people who, because of a facial deformity or a severe cognitive deficit, don't quite match our mental image of the word "human". It's not totally crazy to point out that aborting a down's foetus is somewhat facially similar to euthanising a down's infant back before you could tell in advance.

But philosophically, the two positions seem to me to be worlds apart, and I don't think you can trace any consistent lineage between the two. Nor is it right to say that the ends are the same. One group wants to enhance personal autonomy; the other was trying to build some sort of hyper-sanitized, technocratic collective in which everyone was a happy cog--and the retarded didn't make good cogs. It is the means that are similar.

No more blogging today, and probably tomorrow, and quite possibly Thursday as well. Friday's also not looking so good, and the weekend's shot . . .

I'm moving into my new apartment tomorrow. Then I'm off to New York for, like, an hour, then back to DC, and then off on Friday to Toronto to spa with a friend or two. So while I will try to check in, I wouldn't count on it.

Not that I imagine you were.

I've always thought Jim Cramer a little unhinged, but Felix Salmon catches him going over the edge. Time to adjust the meds, Jim. Normal people do not default on their mortgages because the value of their house has dropped, unless they are in dire financial circumstances. The reason they do not do this is that a 200 point drop in your FICO score is a little painful. Especially if you, er, want to keep the credit cards.