Your were too kind in your recent article where you discussed the possibility of the government capturing a lot of what retirees think they have in their retirement accounts. I have been telling my clients about this risk for some years now. Take a look a this tax chart. We have had a lot of years of 70-90% top tax rates.

What I see as really striking in the tax information going back to 1913 is how little (0) taxes working people were asked to pay then compared to now.

For example, in 1913 the standard deduction for a single person was $3,000! There was no dependent deduction, didn't need one, no working stiffs made enough to pay taxes anyway. The chart that I have only goes up to 2002, but it shows that the standard deduction is still $3,000. If we adjusted the original $3,000 deduction for inflation it should be $63,000 today according to an online inflation calculator which probably understates inflation considerably the last twenty years.

CHS note: according to the Bureau of Labor Statistics, $3,000 in 1913 is equivalent to $63,000 in current dollars.

So what we have is the government taking the money and deciding how to spend it rather that allowing the People to spend it themselves. Waltzing toward Facism, wouldn't you say?

Re: Capital gains, in your Sept 20 piece you remarked on the illusory quality of investment profits when adjusted for inflation. As you probably know, the capital gain rate has varied over the years and one of the principal arguments for the preferential rate has been that gains are largely products of inflation. (There are other more-bogus claims about incentives and jobs and crap, but this one is valid).

The two desirable tax mechanisms for correcting this - indexing gains for inflation (horribly complicated and subject to usual government bogosities), and substituting a net-consumption tax for the income tax (deemed highly desirable but impossible to transition to for reasons I've never understood) have been considered and rejected every time the tax comes up; the preferential rate has always, therefore, been a compromise to provide for some relief from the effect of inflation.

The radical Republican choice, of course, has always been to eliminate the tax altogether, which doesn't seem so nuts in this context, but remains politically ridiculous.

As an aside re: the lower rate on dividends, it is a horrible kludge to compensate for the lopsided treatment of interest vs. dividend payments at the corporate level; it would go away if dividends were fully deductible by companies (which might also reduce the huge waste of money that are stock buybacks...)

In any case, though your point remains valid that the differential treatment of earned income vs. rent income has created perverse incentives within the system, it's difficult to sustain your argument re: capital gain taxes specifically when you acknowledged earlier that a real tax on inflated values is bogus.

Finally, I'm no particular fan of the gross amounts of money made within the hedge-fund industry, but whenever the tax issue comes up the exact mechanisms of the "loophole" have always been elided with the note that it's too complicated to explain.

However, I saw a shill for the industry on the TV recently suggesting that the treatment has to do with an "earned-in" component of their compensation. I'm thinking it's something like this: in a 2+20 scheme, the 2% is guaranteed, paid in cash, and taxed as a fee. 20% is earned contingently, and maybe received as fractional interests in the investment portfolio, and taxed when it is sold at the cap gain rate.

I'm guessing the brouhaha is about the *gains on* the 20% (unless it's also about the initial 20% - what would its basis be?) , but I have no idea. In any case, it's not clear to me that there's a gross distortion of normal tax treatments going on here, just that the amounts are disgusting.

In fact, the political discussion of tax rates is hopelessly politicized and oversimplified. Talk about lower capital gains rates to adjust for inflation and Dems squawk about tax cuts for the rich. Numbers and proportions are shamelessly conflated.

In fact, 20% of upper-bracket taxpayers pay something like 60% of personal income taxes; Dems are now proposing to exempt larger amounts of middle incomes from income tax, such that a majority of households may not owe any income tax (so it then becomes sigificantly undemocratic); everyone complains about paying too much FICA tax but know that social security needs a rate tweak; everyone wants to tax higher incomes for the FICA tweak but not acknowledge that upper-income folks' benefits are capped so it's just a soak-the-rich ploy, etc.

I won't say that rich people can't pay more tax, but I will say that the political discussion about it is functionally illiterate. I hope you aren't falling into a similar trap.

It ocurred to me as an afterthought that the perverse incentive doesn't come from the tax scheme per se, but from the long-term depressive effect of the mobility of capital vs. labor. Though especially pronounced in recent years, I wonder if the stagnation of wages and people's responses since the 70s doesn't have more to do with migration of production to the sunbelt and mexico (then?) and china (now), the erosion of union power, etc. than with their consciousness of the tax code.

More succinctly, big capital has become progessively more concentrated (oligopolistic) and greedier (demanding higher rates of return) and meaner (less willing or required to share productivity gains with labor). We shouldn't be too surprised by this though - corporations are literally capital-concentrating machines - and capital itself has an inevitable tendency to concentrate - cf. how much richer a guy with $10,000 gets over ten years vs a guy with $1,000,000. Hedge funds are in this sense just capital on crack.

Until of course, something happens.