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More Ammo for Mankiw: How Inflation Spikes Cap Gains Rates

January 30th, 2012 · No Comments · Economics

Man of good faith and reason can differ on what an appropriate rate of societal wealth appropriation and redistribution is — but the recent volleys back and forth on the Romney tax rate have me scratching my head over the approach taken by many in the collectivist camp.

Normally I’d say one’s level of outrage over a “15 percent” tax rate on earned interest is inversely proportional to one’s knowledge of finance and/or taxation. Same thinking applies toward the notion that wages and income on savings demand equal treatment by the IRS (risk anyone?). A basic level of sophistication brings an understanding that the effective cap gains rate is much higher than the nominal rate — and is far from “15 percent.”

Greg Mankiw addresses this well here, and Krugman is forced to admit defeat but he feels obliged to snarl during the process while rambling in an unrelated vein about employee wages. The comments are revelatory. Normally he is universally cheered on by his readers, but even they are left scratching their heads.

Mankiw left out one pedestrian yet IMHO noteworthy point. That is that one is taxed on nominal gains, not on real gains. When one factors in inflation and looks at returns on T-Bills over the decade of 2000 to 2010 the effective rate of taxation is more like 25%.

What strikes me is that Krugman and his team shout about the injustice of “15 percent!” from the treetops even when they know that number needs serious adjustment in order to be compared to wage rates. Between corporate taxation and inflation we can be talking about an effective rate that’s at least twice that number. Why don’t they just be honest and say “35% is not enough!”??. Isn’t there a persuasive case to be made via honest analysis? Maybe not.

I have to say this obsession with the number 15 reinforces in my mind, the thinking of Don Boudreaux:

“Krugman spends the bulk of his time today, when writing for the general public, assuring the general public that its economically untutored instincts are correct.”


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