Bush vs. Clinton on taxes

Jeb Bush recently presented some really sensible ideas on tax reform.  For years I’ve been complaining that we tax equity financed investments at much higher rates than debt financed investments.  Not only does that make no sense on either equity or efficiency grounds, it also makes our financial system more unstable.  One reason the 2008 financial crisis was worse than 2001 is that the tech bubble was more about equity and the housing bubble was more about debt.  (Of course NGDP was the main reason it was worse.)

Bush proposes to cut corporate tax rates to 20%, switch to the territorial system used in other countries, allow the expensing of capital investments, and make up (at least some of) the revenue by no longer allowing the expensing of interest costs.  Finally, debt and equity would be on a level playing field.  And there’s lots of other great stuff—eliminate the marriage penalty, no more AMT, no death tax, etc., etc.  But rather than a top rate of 28%, I’d rather see 70%, combined with unlimited 401k privileges.  Still, a great proposal.

And now to go from the sublime to the ridiculous.  Hillary Clinton is proposing a capital gains reform that is so foolish that even the very liberal Massachusetts legislature eventually abandoned the idea.  There would be a sliding scale of capital gains tax rates. Here’s Alan Reynolds:

Hillary Clinton’s most memorable economic proposal, debuted this summer, is her plan to impose a punishing 43.4% top tax rate on capital gains that are cashed in within a two-year holding period. The rate would drift down to 23.8%, but only for investors that sat on investments for six years.

This is known as a “tapered” capital-gains tax, and it isn’t new. Mrs. Clinton is borrowing a page from Franklin D. Roosevelt, who trotted out this policy during the severe 1937-38 economic downturn, dubbed the Roosevelt Recession. She’d be wise to consider how it played out.

It’s scary that Clinton’s advisers are so brain dead on economics that they think there is some public policy purpose that would justify this nonsense.

We had this for a few years in Massachusetts (back in the 1990s, I seem to recall) and it was a nightmare.  You’d get all these complex statements from mutual fund companies about how many cap gains were under one year, or 1 to 2 years, or 2 to 3 years, or 3 to 4 years, or 4 to 5 years, or 5 to 6 years, or more than 6 years. Then for each one you had to laboriously put the amount into the correct category on the form.  If you owned 10 funds, you dealt with 70 calculations.  Eventually Massachusetts gave up on the silly idea.  And now Hillary Clinton wants to revive it? Why?

PS.  Don’t assume from this post that I lean toward the GOP.  On the most important issues facing the country I probably lean slightly toward the Dems, although my actual views are nothing like either party.

PPS.  Couldn’t savvy (and wealthy) investors just use derivatives to lock in gains, without selling?  Will this be like the estate tax, where only the suckers end up paying?

PPPS.  Dilip just informed me that Larry Summers is now blogging.  Instant reaction:  Larry Summers is a very, very, very talented blogger.

PPPPS.  I have a new post on the sticky wage model over at Econlog.




36 Responses to “Bush vs. Clinton on taxes”

  1. Gravatar of Bababooey Bababooey
    9. September 2015 at 08:40

    … we tax equity financed investments at much higher rates than debt financed investments.

    Strictly speaking we don’t tax investment at all, we tax profits. Also, I pay 20% rate on most dividends and 39.6% on all interest so I’m actually taxed at a much higher rate on debt investments than equity investments.

    I know what you really mean, the deduction for interest payments v. no deduction for dividends, but debt has it’s own disadvantages.

  2. Gravatar of Kevin Kevin
    9. September 2015 at 09:15

    Out of curiosity, which issues do you think are most important?

  3. Gravatar of ssumner ssumner
    9. September 2015 at 09:39

    Bababooey, By taxing profits we are essentially taxing investment. If you could expense all saving, including capital expenditures, then you could still tax profits while keeping the tax system neutral regarding saving and investment.

    The federal corporate tax is 35%, so the net tax on interest is close to zero (albeit slightly positive, as you note.) On the other hand the net tax rate on dividends is 20% (actually 23.8%, isn’t it)? I am pretty sure that the Bush plan would sharply cut the 39.6% interest income rate that you cite.

  4. Gravatar of Don Don
    9. September 2015 at 09:52

    A 70% federal rate is like 90% in California. Ouch!

    Clearly Hillary is in the pocket of “Big Accounting”.

    Prof. Sumner was on a recent Heartland podcast. Kind of rough talking to a dumbed-down, hard-money host. Spread the word.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    9. September 2015 at 09:54

    Promising beginning for Larry Summers.

    Also, Alan Reynolds has some fun with Anthony Atkinson (and Stiglitz) here;


    ‘Problem 1: To invite political officials to obstruct labor-saving technology or to encourage (subsidize) employment growth at the expense of output growth are plans to depress the growth of real output per worker (productivity) and therefore depress real income per worker.’

    and; ‘Problem 7: Atkinson is proposing to emulate Arabian princedoms, China and other autocratic states by investing taxpayer funds (like the U.S. Social Security trust fund) in private equites and real estate. Malaysia’s wealth fund, for example, is the majority shareholder in Malaysian Airlines, whose stock recently fell 90%. Governments with budget deficits would be investing borrowed funds in stock markets, which is as speculative as individuals buying stocks on margin. The authority to allocate taxpayer capital by political favoritism could not safely be entrusted to even the most saintly and omniscient bureaucrats and politicians, and they would bear none of the losses from bad investments.’

    and, ‘After his 15 Proposals, Atkinson also mentions even stranger “Ideas to pursue.” The zaniest, borrowed from Thomas Piketty, is “a global tax regime for personal taxpayers, based on total wealth.” Try to imagine the size and power of the required global army of tax collectors attempting to assess every wealthy individual in every country and collect a tax based on such inevitably arbitrary assessments. If such a tax could be enforced on a global scale, there would clearly be no democracy anywhere.’

  6. Gravatar of A A
    9. September 2015 at 10:40

    @Bababooey, note that your 20% dividend tax is basically a tax on investment, as opposed to profit, accompanied by a lower capital gains when you sell. You are paying tax as if you sold with a 0 basis, in exchange for lending to the government the difference between capital gains with and without a payout.

    If your company only makes a return equal to inflation, and retains all profits, you pay a big real tax on your “profits”, but only when you sell, and in proportion to your capital gain. If your company dividends the “profits”, then you pay the real tax on your whole dividend, and only claim the reduced capital gains benefit (reduction in taxable value due to payouts) when you sell. Kind of weird.

  7. Gravatar of collin collin
    9. September 2015 at 11:23

    At this point, Jeb! is very much against the Iran nuclear deal and HRC is for the deal. That makes my vote for HRC real simple even with this ridiculous tax plan that will never pass and overdone college plan. (And yes I do believe Jeb! end goal is to bomb Iran at some point.)

    Anyway, I don’t see Jeb! winning the nomination and the Republican made a poor choice of giving millions to him to be the unearned frontrunner. Jeb had the potential to be President but history was not kind to him and he seems to have a bit of Ted Kennedy disease. Jeb does not appear to have a burning desire to be President and his level of competence was Governor.

    In terms of the Republican Primary, the second place in most polls would be “Not Sure” which means this race could end up on any of 6 – 8 candidates. (This is not like predicting Chinese GDP growth rates.) But if I had to bet, I would go with Tedd Cruz.

  8. Gravatar of James Alexander James Alexander
    9. September 2015 at 11:39

    Don’t you think Summers goes on a little too long?

    More seriously, it’s a worry he feels so concerned, like Kocherlakota breaking out so loudly a few weeks ago. Makes one think the Fed really could raise rates next week.

  9. Gravatar of ssumner ssumner
    9. September 2015 at 12:04

    Kevin, I’ll do a post on that in a couple of days.

    Don, I favor a top income tax rate of 0%. I was contemplating a 70% top consumption tax rate, basically a 70% consumption tax on Larry Ellison. (Not Warren Buffett.)

    Patrick, That Reynolds post sounds excellent. (And the ideas he criticizes really sound silly.)

    Collin, Mostly agree (although I doubt Jeb would bomb Iran.) Otherwise I agree. I have no idea who they will nominate–it’s such a weird year that it could even be a dark horse like Kasich or Fiorina. For VP I see Rubio or Fiorina. Not sure it matters, the Dems will probably win again.

    James, Yes, but it’s his first post, and he wants to come out guns blazing on the rate increase. But I suppose he’s always been a bit longwinded (like me.)

  10. Gravatar of marcus nunes marcus nunes
    9. September 2015 at 12:32

    Supply-siders have to take into account demand “deficiencies” before their policies can show success:

  11. Gravatar of Ben Ben
    9. September 2015 at 13:02

    Pretty sure using derivatives to lock in returns is considered a wash sale using “substantially identical securities” , but it’s likely you wouldn’t get in trouble unless audited.

  12. Gravatar of Doug M Doug M
    9. September 2015 at 13:30


    Yes, we tax profits. Look at how corporate cashflows are taxed under debt financing vs equity financing, and then how the investor is taxed in both scenarios.

    In the debt financed company, the company deducts interest expense from profits. The bond holder pays tax on interest income at the level as his personal income tax rate. The equity financed company pays taxes on profits and then distributes them as dividends, which are taxed again.

    Finance with debt.
    Corporation pays 0% tax on income before distribution.
    Investor pays taxes on dividends at 35%
    net 35% tax

    Finance with equity.
    Corporation pays 35% tax on income before distribution.
    Investor pays taxes on dividends at 15%
    net 45% tax

  13. Gravatar of Kenneth Duda Kenneth Duda
    9. September 2015 at 14:22

    Scott, I’m curious about something. I find all of your tax logic convincing except for the estate (death) tax. I see no reason why Bill Gates’ children should inherit control of Microsoft corporation. I do not see a hereditary aristocracy as a good thing. What is the logic behind estate tax repeal?


  14. Gravatar of bill bill
    9. September 2015 at 14:48

    I’d like to see corporations taxed like REITs. If the taxable income is distributed then the corporation shouldn’t be taxed.

  15. Gravatar of marcus nunes marcus nunes
    9. September 2015 at 14:53

    Obviously, Jared Bernstein doesn´t agree:

  16. Gravatar of marcus nunes marcus nunes
    9. September 2015 at 14:56

    More obviuosly even, neither does this guy:

  17. Gravatar of Bababooey Bababooey
    9. September 2015 at 15:55


    I think you (and other economists) are creating a useful thinking model where you lump all components of a corporation (the corporate taxpayer, the shareholder, the employees, the vendors, the customers) and can then use concepts like a “net tax on interest” or “employees bear 100% of employee taxes”, etc. That is an enjoyable and insightful way to think about policy.

    But I think the lumpen model overstates the incentive of debt’s tax advantages. No taxpayer actually pays “a net tax”, each taxpayer calculates and pays their own taxes and responds accordingly. A corporation swimming in NOLs, a 10%+ nonresident shareholder, etc have their particular concerns that do not fit the lumpen model and negotiate at that level. The debt tax advantage is, in my experience, subordinate to other factors in most M&A or investment deals- disfavor of financing contingencies, leverage, cost of capital, exit strategy, investor tax sensitivity all play a more decisive role.

    And for new companies, the “net tax” concept is moot because you get the same benefit and more by using pass-thru investment vehicles (most entity taxpayers are pass-thrus). To be fair, it does come up sometimes, usually where a buyer has negotiated to acquire operating company stock instead of assets and is trying to make the best of a bad tax structure.

    PS, I’ve been for progressive consumption tax since 1998, welcome aboard 🙂

  18. Gravatar of benjamin cole benjamin cole
    9. September 2015 at 16:23

    Good post. I still see no presidential candidate willing to say the federal government should be radically reduced in size, in both civilian and military agencies.

  19. Gravatar of Major.Freedom Major.Freedom
    9. September 2015 at 16:45

    Benjamin Cole:

    Until you yourself advocate for a reduction in ALL state agencies, including central banks, you’re being hypocritical for criticizing those political candidates.

    Just like you crave more Federal Reserve in every other post, so too do those power thirsty political candidates crave more Federal government.

    As if the cherry picked agencies you personally prefer to be reduced, while others are to increase, is the right level of federal statism.

    The onky level of statism that prevents you or I from pretending not to be imposing on the other, is zero statism.

  20. Gravatar of Brian Donohue Brian Donohue
    9. September 2015 at 17:11

    @Scott, have you ever elaborated your thoughts on “carried interest” taxation?

    Also, I’m with Kenneth Duda on the estate tax. The great marriage of life’s two certainties.

  21. Gravatar of ssumner ssumner
    9. September 2015 at 18:37

    Marcus, I agree.

    Ben, Thanks for that info.

    Doug, That’s helpful.

    Ken, I see your point, but here’s how I think about it. I start with the consumption tax as the model—tax people on what they take out of society, not what they put in. Then consider a rich old guy who has ten years left to live. He can choose to live the last years like Buffett, in his $800,000 house, or like Larry Ellison, with many houses, islands, 500 yachts, etc. I’d like to tax the Ellison guy more, but the estate tax leaves Ellison untouched and hits Buffett hard. It’s saying we’d rather you splurge on yourself than leave the money to others. Why?

    Now I do understand that if you turn around and look at it from the point of view of undeserving trust fund babies, it may seem different. But I’d like anyone to be able to hold wealth as long as they want, including future generations, and only pay tax when the money is consumed. If 200 years from now the dynasty gives it all to charity, without ever having splurged, or paid much taxes, that’s fine with me.

    It seems to me that Microsoft stock would be worth far more if managed by an expert, as compared to its value if managed by Bill Gates’s kids. So they’d have an incentive to turn control over to someone else. But I can’t deny that nepotism might occasionally lead to undesirable outcomes. I’d guess that doesn’t happen much in your area however (tech), it seems to me it’s more likely with a family businesses like ranching, construction, auto dealer, etc.

    Bill, Sounds like an interesting idea. I haven’t studied REITs.

    Marcus, I haven’t looked at it closely, but I suspect they are right that it yields too little revenue. I love the structure of what Bush proposes, but the rates need to be higher.

    Bababooey, I defer to your expertise on the nuts and bolts. But I do believe that the underlying tax incidence does affect the behavior of firms. I think Bush’s plan would lead to less debt and more equity.

    And I welcome YOU, as I favored a progressive consumption tax when you were just a kid.

    Brian, I don’t know enough to comment. I generally favor taxing people as if it’s labor income, unless it clearly is not labor income. If you run a hedge fund, money you make from your business is probably labor income, unless you have a really, really strong argument otherwise. But I can’t say more.

  22. Gravatar of Steve Steve
    9. September 2015 at 18:54

    “Otherwise I agree. I have no idea who they will nominate-it’s such a weird year that it could even be a dark horse like Kasich or Fiorina. For VP I see Rubio or Fiorina. Not sure it matters, the Dems will probably win again.”

    A Rubio/Kasich ticket would be awesome: ideological moderation, expand the party, and lock up FL and OH.

    Cruz/Fiorina would be even better as we would have two fire-breathing dragons incinerating democrats in the debates.

    My biggest fear is Donald/Ivanka 🙁
    Not that I hate Trump, but he needs to grow up.

    “Dems will probably win again.”

    Dems don’t even have a viable candidate yet. They’ve got a cybercriminal, the oldest geezer in presidential history, and a reluctant grieving warrior who has o-baggage.

    “For VP I see Rubio or Fiorina”
    I believe this makes you sexist (and racist).

  23. Gravatar of Steve Steve
    9. September 2015 at 19:03

    A couple of other thoughts:

    I like Jeb Bush personally, but I find the idea of dynasty revolting.
    The biggest risk, however, is that a mid-east war is likely 2017-24, and a Bush presidency would pose unmanageable legitimacy risks.

    As far as Hillary’s capital gains tax proposal: that was copied from Larry Fink at Blackrock. I agree it is incompetent.

  24. Gravatar of Chuck Chuck
    9. September 2015 at 19:10

    All this and not a single word about spending.

  25. Gravatar of athEIst athEIst
    9. September 2015 at 21:17

    death tax.
    Falling for Frank Luntz’ misleading terminology.
    It is an estate tax or an inheritance tax. It fall on heirs. You can’t tax dead people.

  26. Gravatar of cthorm cthorm
    10. September 2015 at 07:31

    Reading Summers’ post makes me realize just how hard it is to judge someone’s views from afar (or at least how bad I am at it). I had the impression that he was full of bravado and self-assurance; instead he writes a thorough, well-thought argument in transparent bullet point prose. Most importantly, I agree with what he had to say.

  27. Gravatar of JonathanH JonathanH
    10. September 2015 at 08:44

    Scott, your arguments in favor of a progressive consumption tax over the years are very convincing. Out of curiosity, could there be some sort of consumption tax arbitrage? If I were in the 70% consumption tax bracket, I could pay someone who is on the very low end to purchase goods for me. It might be cheaper to hire a light consumer to do all my shopping than if I were to do it myself.

    This doesn’t seem like a bad thing, but it crossed my mind as an interesting possibility.

  28. Gravatar of JonathanH JonathanH
    10. September 2015 at 08:50

    Maybe I will answer my own question. The more I thought about it, it sounds silly. Everyday items would be incidental for consumption. And you can’t really pay someone to buy you houses, cars, and boats because those big ticket items would get noticed and more likely to fall under the higher percentage tax.

  29. Gravatar of ssumner ssumner
    10. September 2015 at 10:00

    Steve, I don’t like any of them. I suppose Rand Paul is a lesser of evils, or was until he started moving to the center on issues like foreign policy.

    Atheist, When I turn 60, the 60 year old Scott Sumner will “inherit” lots of money from the 59 year old Scott Sumner. Why no tax? I know, because I didn’t die.

    Jonathan, It’s an interesting question as to how the consumption tax can be made progressive. Here are three possibilities:

    1. High taxes on luxury goods.

    2. A progressive wage tax. Wage taxes have an identical effect to consumption taxes, in the long run,

    3. An income tax with unlimited 401k privileges.

    All three systems would avoid the problem you mention.

  30. Gravatar of Matt McOsker Matt McOsker
    10. September 2015 at 11:29

    I am with Hyman Minsky, the federal corporate tax rate should be zero.

    “A corporate income tax, which allows interest to be deducted prior to the determination of taxable income, induces debt-financing and is therefore undesirable. A corporate income tax also allows nonproduction expenses such as advertising, marketing, and the pleasures of the executive suites to be charged against revenues in determining the taxable income.”

    Federal taxes should be used as an inflation control and to help regulate aggregate demand. Consumption taxes do that, and should be under the control of the Fed. I know, I know politically a nightmare.

    Let states decide whether to tax corporate income or not. And federal taxes on the 99% need to be reduced as well, hopefully in advance of a slowdown.

  31. Gravatar of Bush vs. Clinton on taxes « Economics Info Bush vs. Clinton on taxes « Economics Info
    10. September 2015 at 14:00

    […] Source […]

  32. Gravatar of Jeff Jeff
    10. September 2015 at 19:58

    Scott, I like the idea of taxing only consumption, not income. But it’s unlikely to be enacted.

    But there is an idea I think should be popular and would reduce a lot of distortions: Eliminate the corporate income tax and tax all income, including capital gains, identically.

    Think how many tax lawyers and accountants this would put out of work. It also has the nice side effect of taxing equity dividends and capital gains the same as interest income, which would result in a lot less debt finance and more equity finance. Since debt is the ultimate sticky price, this would make the economy work better.

  33. Gravatar of ssumner ssumner
    11. September 2015 at 06:53

    Jeff, I think it would be a mistake to tax labor and capital income equally. Those two types of income are not at all comparable

  34. Gravatar of Floccina Floccina
    11. September 2015 at 06:57

    Bush proposes to cut corporate tax rates to 20%, switch to the territorial system used in other countries, allow the expensing of capital investments

    Can the average voter understand that retained earning should not be taxed?
    If you stop taxing retained earning which are investment, politicians will see an opening and yell tax breaks for the rich! The rich need to pay their fair share!

    I love this:
    I’d rather see 70%, combined with unlimited 401k privileges.

    Though I would rather it be:
    I’d rather see 70%, combined with unlimited IRA privileges.

  35. Gravatar of Jeff Jeff
    11. September 2015 at 07:22

    Scott, if you tax capital income differently than labor income, you’re going to have a lot of people complaining about the rich not paying much in taxes.

    I do think that if you could come up with a way to tax only real returns to capital, rather than nominal returns, that would be an improvement.

  36. Gravatar of ssumner ssumner
    12. September 2015 at 05:35

    Jeff, Yes, stupidity is one of the biggest roadblocks here. Even many liberal economists understand why you should not tax capital income, but it’s hard to explain to the general public. One way is to set up a tax regime that seems to be taxing capital income, but actually only taxes labor income. This would be a income tax with unlimited 401k privileges. Then when the money is withdrawn, people pay tax on all of it, including dividends and capital gains. It looks like capital is being taxed, while in fact it is not. You fool the public for their own good.

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