5 Comments

Lee, this discussion is so clear and your solutions so obvious that I am sharing this article with my real estate students and others. Thank you!

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Thanks for the compliment and, more importantly, for sharing with your students and others. It seems like few people understand how this really works.

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Some very good points in your analysis, Lee. Some additional points might be considered. First, there are at least two alternatives to your proposal for subsidies. One is to replace most (but not all) existing subsidies with a Universal Basic Income that is income tax financed. This could produce a progressive overall incidence (taxes and subsidies combined). A different but similar alternative is to use a refundable Negative Income Tax (a la Friedman), which is politically more feasible than a UBI because it has lower revenue requirements to finance it. Second, I agree that it makes no sense to tax capital gains at a different rate than other income; however, fairly long-term nominal gains can represent much lower real (inflation-adjusted) capital gains. If, for example, a person owned an asset that appreciated at exactly the same rate as inflation, they would have a tax obligation on an asset that had not appreciated at all in real terms -- since it's nominal gains that are taxed. This also makes no sense. A solution would be to deflate the gains with a price index for purposes of taxation.

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Thanks for bringing up the UBI approach. While I think that it has a merit, I think there are specific things that we’d want to subsidize and I also think that there are some political benefits to specific subsidies rather than a UBI. I plan to discuss this a bit in my next post.

I agree that inflation-adjusted capital gains can be worth a lot less than the nominal gains. But if we inflation-adjusted capital gains, why wouldn’t we inflation adjust interest-bearing savings too. Probably for the last 15 years any money put in an interest bearing savings account lost real value yet we pay annual taxes on the interest earned. So, should we refund that loss? I haven’t really thought much about this issue, but I worry that we could once again institute a policy that benefits capital without providing a similar benefit to people who can’t/don’t invest. Am I missing something on this?

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Great read. My summary - simpler is fairer for all. Complexity benefits - you guessed it :-)

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