When Samuelson, Tobin, Kudlow, and Perry debated the capital gains tax

With all of the attention to Representative Alexandria Ocasio-Cortez’s suggestion to raise the top marginal personal income tax rate as high as 70 percent, it has been notable that there has been little mention* of another candidate for making the tax system more equitable. Capital gains are taxed at a lower rate than “ordinary” income, and have been for some years. Wealthier people tend to make more of their income from capital gains, poorer people from wage income. Why not consider bringing the two rates closer together?

In 1992, when the US economy was coming out of a recession, the Joint Economic Committee of Congress held a series of public hearings. Chaired by Senator Paul Sarbanes, the panel of four included Nobel winning professors Paul Samuelson and James Tobin, as well as George Perry, Senior Fellow at Brookings, and Lawrence Kudlow, then the chief economist of Bear, Stearns & Co, and now Director of Donald Trump’s National Economic Council.

Much of the discussion focused on monetary policy and treasury operations, but a query by Representative Richard Armey about the capital gains tax led to a memorable exchange; memorable enough that I recall it years later. And, thanks to the magic of The Internet**, I was able to find it.

Armey and Kudlow favored lowering the capital gains tax rate as a means of stimulating investment, but Samuelson did not:

“For many years a good deal of middle-class recreational time was spent in converting ordinary income into low-tax capital gain. That did not create jobs. In recent years, affluent folks have desisted from that activity, because the same rates have prevailed for ordinary income and capital gains.”

George Perry tended to agree, noting the inefficiency of the lower capital gains tax as a stimulus measure. He also referred to Samuelson’s leisure activities and Kudlow’s profession to illustrate the effects of differential tax rates:

“It is not that Professor Samuelson would stay up nights doing this. It is that an industry would probably crop up to do it. Mr. Kudlow’s firm would invent instruments, the whole purpose of which would be to play with nominal interest rates on the one hand and real capital gains on the other. That is the kind of thing that the financial world has gotten very good at doing.”

All seemed to agree that indexing makes sense, not surprising after years of moderate inflation. James Tobin, known to many for his q (seriously, every young economist dreams of having a letter named after him or her) added a qualification, again drawing on Samuelson’s leisure-time habits:

“if we index the cost basis for capital gains for the purpose of taxation, we have to index the whole tax system. … [I]f you index capital gains and don’t index also the interest part of the tax law on both sides-the declaration of interest as income and the deduction of interest as cost-then it is possible for Mr. Samuelson to play games and he would. He would borrow money and charge the nominal rate as the cost on his tax bill, and yet pay tax only on his real gains. So, indexing is not a simple reform.”

Tobin also pointed out that:

“Under the present law, there is no capital gains tax levied at all on assets held until death, assets that go into estates for inheritance. None at all. So, to say that the capital gains tax is such a terrible burden ignores that essential fact.”

Samuelson livened up the discussion of death:

“Since I am being caricatured as the legal tax avoider, let me say that I think of nothing so much as the date of my death. Unfortunately, it complicates my plan because I don’t know what that date is.”

So there you have it. In 1992, civil, even humorous, debate was possible among people who do not agree with each other, speculating on each other’s leisure habits and thoughts of death. And, as it turns out, they also debated, in simple terms, a basic public policy question about the best way to tax economic activity. Here is a link to the JEC proceedings.


*Just today, an Op-Ed in the NYT argued for increasing the capital gains tax rate.

**As a fan of old technology, I also note that the online document serves as a reminder of the cracking chart-drawing technology of the time. I know from a review of the World Bank’s partnership with Mongolia that the first Mongolia report with a chart in it was published in 1992.  The quality of the graphics in the JEC report was similarly impressive.

first chart in wb report
Link to tweet
jec chart 1992
Hearings before the Joint Economic Committee Congress of the United States,
One Hundred Second Congress, Second Session, January 9,10,13 and 31, 1992. 


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