New York Times columnist Nicholas Kristof has a column in today's New York Times under the headline "Taxes and Billionaires."
He writes: "financiers have gotten away with paying a lower tax rate than their chauffeurs or personal trainers. Tycoons have bet for years that the public is too stupid or distracted to note that in many cases they're paying just a 15 percent tax rate." This distorts the issue. In fact those in the 15% income tax bracket — up to $69,000 a family — pay a capital gains rate of only 10%, less than the 15% rate paid by "tycoons" on their capital gains.
Mr. Kristof suggests that John Paulson is a big beneficiary of this tax break. But many of Mr. Paulson's and his fund's holdings are in gold, which is mostly taxed at a higher "collectibles" rate, not the lower 15% rate.
Mr. Kristof's article relies largely on the work of Victor Fleischer, a law professor at the University of Colorado, Boulder. The University of Colorado, Boulder is a state institution that doesn't pay any income tax at all at the corporate level.
Mr. Kristof at least has the intellectual consistency to say that if taxes on carried interest are raised, so should the tax on "founder's stock, the shares people own in companies they found. Professor Fleischer has written an interesting paper persuasively arguing that founder's stock is hugely undertaxed. It, too, is essentially a return on labor, not capital, and shouldn't benefit from the low capital gains rate."
Mr. Kristof doesn't explain why labor should be taxed higher than capital — in fact just few paragraphs earlier he was arguing that it was wrong for tycoons to be taxed at a lower rate than personal trainers or chauffeurs. It's hard enough in this economy to get people to take entrepreneurial risks to create jobs and growth; I don't see the wisdom in moving to reduce the rewards available to entrepreneurs. I suppose there's a certain logic to the Reagan-era rates that set capital gains and ordinary income rates at the same levels. Then labor and capital are taxed the same. As for Mr. Kristof's reference to the "low capital gains rate," it's worth remembering that quite a few of America's international competitors — Hong Kong, Singapore, Switzerland — have capital gains tax rates of 0%. Compared to that, America's 15% rate isn't "low," it's high.
For some background on the "carried interest" issue, this Washington Examiner article from April 2010 is a good place to start.