Fairness and the capital gains tax

Mike Konczal has an excellent rundown of recent arguments about the fairness of the capital gains tax. Konczal titles his post “Is Taxing Capital Income Fair?” To me, there is a more interesting question that precedes the one being asked here, and that is: is capital income fair?

As Richard Seymour recently pointed out, descriptions of capital gains almost always take on a magical and mystical tone:

Save your money, you are told, or invest it, and it will just magically increase in value. Buy a private pension scheme for a fraction of your weekly earnings, and when you retire you can have a lavish, hedonistic lifestyle that would make Mitt Romney blush with noble envy. Better yet, save enough money to use as start-up capital, become a capitalist and one can, with sufficient nous, acquire enough dough to get the Kardashians’ telephone number. Something very nebulous and mystical about the process of abstaining from immediate consumption, and entering this money into circulation as money-capital, causes it to produce a ‘surplus value’, above and beyond what was originally invested.

Move your money from one account into another account, and watch it just increase somehow. Your money works for you! Of course, money cannot work. It’s pieces of paper or records in computers. It does nothing. Now people can work and in so doing create products and services that are very valuable, but pieces of papers and records in computers cannot. The discussion of how money in the account leads to more money in the account is almost never had. When we start having that discussion, the morality of capital gains becomes very suspect.

There are two focal points of analysis for capital gains. The first focuses on the person receiving the capital gains and asks: what exactly did they do to receive them? The second focuses on where the capital gains are coming from and asks: where does the economic value that is being realized in capital gains come from? On the latter question, I think Marxists have always had a very good point. Workers — this category includes management, executives, and everyone in a firm — do the labor that produces the economic value. Someone who receives capital gains does so by skimming off the top of others’ work. For the moment, I will leave aside the worker exploitation side of the capital gains analysis because you do not actually need it to think capital gains are suspect.

Focus just on what the person who receives capital gains is doing. Let’s use Mitt Romney as an example. According to Romney’s 2010 tax returns, he “earned” around $20 million dollars from capital gains. What did he do to receive that money? He handed a huge chunk of money to Goldman Sachs, and then they bought up assets with it via a blind trust (blind because Romney is not supposed to know where the money is being invested). So at time one, Romney moved money from one account into another account. And then one year later, Romney had $20 million more dollars. That is, functionally speaking, all he did.

In some ways, using the dollar amount can really mask what is going on here too. Think of it this way: a year after moving money into a new account, Romney had somehow accumulated 20 million candy bars. Truly imagine that. Owing to his shifting money around, over the course of the year, truck after truck of candy bars is delivered to his house. Did Romney make those candy bars? No. Did he do work equivalent to producing those 20 million candy bars? No. Yet, he has 20 million more candy bars.

People might rightly look at those gains with extreme suspicion, especially in America given its heavy ideological emphasis on hard work. If you believe that individuals are only entitled — as a matter of distributive justice — to what they produce, or an equivalent value thereof, you may very well say capital gains are not real income. In fact, they are even sometimes called unearned or passive income. Under such a view — one generally called desert theory — you could easily say that capital gains are themselves unfair. And if they are unfair, surely taxing some of them away is completely non-problematic. After all, the capital gainer does not earn or deserve what he or she is getting to begin with.