Tax Analysts Blog

When it Comes to Capital Gains, Huntsman is Talking Nonsense

Posted on Sep 2, 2011

In his recently unveiled tax plan, GOP presidential candidate Jon Huntsman gets things seriously wrong on the subject of capital gains.

Here's what Huntsman has to say:

    Capital gains and dividend taxes amount to a double-taxation on individuals who choose to invest. Because dollars invested had to first be earned, they have already been subject to the income tax. Taxing these same dollars again when capital gains are realized serves to deter productive and much-needed investment in our economy.
Real pearls of wisdom here. And lots of stuff going on all at once. To make things simple, let's dispense with Huntsman's assertion that dividends taxed at the individual level are getting hit twice. In broad strokes, that's probably (although not necessarily) true.

Instead, let's focus on Huntsman's suggestion that taxes on capital gains also amount to double taxation. Huntsman is plausibly correct that the "dollars invested" have been taxed on the front end. But what about the gains from that investment? Under the Huntsman plan, they would never get taxed at all.

Say, for instance, that I mow a few lawns and make enough money to buy a share of Berkshire Hathaway (OK, a lot of lawns, since BRK.A is currently trading at $105,160 a share). All that invested money is taxed (assuming I dutifully reported all those cash payments from the lawn owners). But when I sell that share 20 years later for a kabillion dollars, I get to subtract that hundred grand when calculating my capital gain. In other words, it doesn't get taxed again.

Of course, I do get taxed on $1 kabillion minus $105,160. But that's reasonable since I have never paid tax on that income. And that's what it is: income, just like the money I make from mowing lawns. (Well, not just like it in all respects, but certainly from a fairness perspective.)

Now there are reasonable (although not, to my mind, persuasive) arguments about why we might want to eliminate taxes on investment income. In some vague fashion, Huntsman seems to be groping for a coherent argument about why we should tax consumption rather than income.

But he gets seriously lost along the way. So let's just call this Huntsman plan what it really is: a huge, highly confused, poorly defended giveaway to people who earn lots of money from their investments. For people who can live off investment gains, it delivers the pleasure of a tax-free lifestyle.

And just in case you're wondering, these people are super rich. As Pat Garofalo at notes, "At the moment, the richest 0.1 percent of Americans pay 44 percent of the capital gains tax, and 68.3 percent of the tax is paid by the richest 1 percent. The bottom 95 percent of Americans pay just 10 percent of capitals gains taxes."

So we know who's voting for Huntsman.

Read Comments (1)

Joseph J. ThorndikeSep 2, 2011

I intended my "nonsense" descriptor to apply to Huntsman's suggestion that the "dollars invested" are taxed twice, since I think this ignores the way we calculate taxable gains by allowing for basis. He refers to "taxing these same dollars again," which I think is incorrect. It's only the new dollars that are being taxed as a capital gain.

As for my contention that gains in excess of basis have never been taxed at the individual level, I think that's a reasonable statement (as I phrased it in my hpothetical example: "*I* have never paid tax on that income.") But to be fair, so is the contention that such income may have been taxed (often in some watered-down, largely notional fashion) at the entity level. I tried to allude to this (vaguely, I'll admit) when I said that such gains, when considered at the indivdual level, are the moral equivalent of regular income, if not always the economic equivalent.

As a colleague warned me while writing this post, arguments about "double taxation" are often more semantic than substantive. As this exchange demonstrates, I think that's probably true.

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