Capital Gains

The Right Way to Tax Mitt Romney, Part 2—David Frum

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Yesterday I elaborated on the reasons in favor of a lower tax rate on capital gains.

The case in favor can be summed up as follows: capital gains taxes are taxes on transactions. Raise the rates, and you impede efficiency-enhancing transactions - and thereby harm everybody's economic welfare.

On the other hand, as we have also seen over the past dozen years, low capital gains rates also promote the concentration of wealth. Wealth concentration is a challenge in itself - and also poses trouble for a democratic political system, which is distorted when a narrow few exert massive political influence while millions more exert very little.

How to resolve this?

The ideal tax solution is a progressive consumption tax, which leaves capital transactions totally untaxed so long as the money remains invested - but then taxes people when they spend, and taxes those who spend more at a higher rate than those who spend less. A progressive consumption tax is a less radical transition than it sounds: if you allow people to save in an unlimited IRA, everything outside the IRA is almost by definition consumed.

But failing that, an idea I've been noodling these past few weeks is a federal property surtax on domestic properties above a certain aggregate value. It's one way to capture consumption: tax increasingly lavish homes at increasingly lavish rates. You'd want to aggregate the homes, because somebody who owns two $10 million homes is spending more than somebody who owns one $12 million home.

You'd have to rely on local authorities for assessments, which presents some problems, and there may be other issues I haven't anticipated, but it seems one way to tax people - including foreign nationals - whose incomes are sheltered but whose consumption remains conspicuous.