Is it time to discuss the capital gains tax?

By Steve Packer of Newberg, Oregon. Steve describes himself as "a retired computer programmer and sports fishing enthusiast."

At a candidate forum for the Washington County Democrats, Tom Hughes, candidate for Metro Council President, asserted that Oregon’s revenue instability is not intrinsically the result of our income tax but rather a result the capital gains portion of our state tax. This is not new news but it is interesting that the idea is not part of the continuing debate for stability. Tom based his participation in the Governor’s taskforce on Comprehensive Revenue Restructuring (pdf).

The latest economic down turn has resulted in unemployment increasing from about 4% to more than 10%. However, even now some of us are doing very well. So, one would expect revenue short fall from income tax to be in the single digits and not the huge double digit short fall we faced in this period. Capital gains, on the other hand, are very sensitive to the economic environment and can approach zero in a down market (and carry-forward will affect subsequent up years). If we are to achieve stability, we probably should address the capital gains component of our tax.

Both residential and business real estate taxes have a like-kind transfer so the instability has to be with stock sales. During the dot com bubble, stock options, stock grants, employee purchase plans and general exuberance produced stock sales and capital gains. A lot of these employer programs have changed and the market instability is producing capital losses to balance gains. It’s a wonder there are any tax revenues from net capital gains.

Taxes on net capital gains have two purposes. One purpose is to spread a fair share of the tax burden to people who do not get the majority of their income from wages. The second purpose is to damp down speculation in the market. The latter is increasingly important with the creation of computerized trading.


The first purpose should have a tax rate that is as high as earned income. There is nothing to indicate that stock profits used to purchase the benefits of life are more or less valued than earned income. The latter purpose, however, should be low enough to encourage trading at human speeds and curtail computer speed trading.

Of course, we all should be saving for the future, including our retirement. And, a prudent policy is a diversified savings plan that includes stocks, most typically in a mutual fund. Even more important for me is the diversification of the ownership of American corporations. If we all own a piece, we can inhibit the accumulation of great economic power in a few hands. Controlling corporate ownership is probably an unreasonable goal. For our savings plans the capital gains tax doesn’t make much sense to me unless we take the money out to spend.

Stock trading does not have the benefit of like-kind transfers like one finds for real estate. They do have a penalty for like-kind transactions that yield paper losses but not for prudent changes for performance and security. With the enormous volume of stock transactions, keeping track of the basis is hard enough but would become impossible with some sort of comprehensive like-kind exemption.

In addition, humans are susceptible to a money illusion. We just cannot adjust for inflation. One of the critical skills for any business plan is the use of constant dollars for judging a projects value. Without some inflation proof metric, the results may look good but are no be better than just buying bonds. This illusion happens with stock and capital gains as well. Far too often we pay taxes on gains that just the result of inflation and we end up paying a penalty for choosing savings plans that hedge for inflation. Chile may have the ultimate solution with a metric that is based on cost of a bag of groceries. One might then pay taxes only on the change in the indexed value and not on the dollar value. Fat chance of that idea every succeeding!

For the capital gains tax rate, the Feds picked a random number between 0% and 100% of the income tax rate. They picked ~50% which is a fine random number but not very logical. I think Oregon should reconsider the capital gains tax rate to both reflect taxing real gains and to smooth out the revenue it generates. This smoothing would have us save some of the capital gains revenue during boom years and compensate for flagging revenue during the bursting bubble. The question then will be to ask if anyone believes there is another bubble in our future and a subsequent burst. Or, will we run with the herd into another dot com or housing bubble. My guess is you will all want a black tulip sometime in the future.

Comments

  • Exit Oregon (unverified)
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    Awesome post!

    Almost 800 words, and I can't tell if the author wants to raise or lower capital gains taxes in Oregon.

    What's worse, is that Mr. Packer seems to think that most capital gains are created by robots engaging in computerized trading.

    In the real world, most capital gains are earned by entrepreneurs who take a risk on a business idea and win. In the real world, capital gains are earned by savers who put money in securities markets with the expectation that their investments will grow and pay for their kids' college or their own retirement. While its growing, that money is used by firms to start and expand their businesses. Businesses that hire people.

    Just last week, entrepreneurs and investors were giving the state an earful about its anti-business and anti-entrepreneurial environment. I hope that is part of the "discussion."

    http://exitoregon.blogspot.com/2010/03/oregons-new-taxes-spark-entrepreneurial.html

  • Scott in Damascus (unverified)
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    Always nice to hear from the Oregon Chamber of Commerce.

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    Exit Oregon: Just last week, entrepreneurs and investors were giving the state an earful about its anti-business and anti-entrepreneurial environment.

    Let me fix that for you, Exit: "Just last week, entrepreneurs and investors idiot butthurt Republicans were giving the state an earful about its anti-business and anti-entrepreneurial environment bitching and moaning about not being able to foist all the sacrifices of the economic downturn that they caused onto the poor and the shrinking middle class."

    You see, real successful investors like Steve Packer know the following thing about the law that the Legislature passed:

    1. Fifty years ago corporations paid 50% of all taxes in Oregon. Now they pay 6%.
    2. Oregon was 2 out of 50 in terms of lowest business taxes before the slight tax increase the legislature passed. Afterwards we're now 4 out of 50 in terms of lowest business taxes.
    3. Most of the Oregon tax rate increases go away in 3 years. Only a tiny sliver on corporations making over 10 million dollars a year is permanent, and all that money goes to the rainy day fund.
    4. Human and physical infrastructure is what actually fosters economic growth, not low tax rates, which is why Oregon lags behind other States with higher taxes, and why the third world (most nations of which are run like Republicans would run the U.S. if they could) is the basket case that they are.

    Finally, let me state that I know Steve Packer. He is one of the most honorable men I've ever met. And in addition to his modestly saying that he's a retired programmer and sports fishing enthusiast, he is also a high flying investor who has done exceedingly well even in a down market. He has more knowledge of business in his little finger than you have in your entire, petulant, vacant head "Exit Oregon". So when he says capital gains tax should be fixed, he's saying the kind of people who can afford to pay a little extra to address the State's problems, are people like him. He's putting his nation's interest before his own.

    Of course that's too much to ask of asses like you. Go crawl back under the rock you came out from.

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    "idiot butthurt Republicans"?

    Steve, you're getting mellower and mellower every day.

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    Alas, Wayne, as much as I'd like to take credit for it, I'm not the one who came up with that colorful descriptive.

    [Warning, if you have sympathy for the GOP, do not view any of the following:]

    Sniveling Republican: http://thepatriotaxe.com/butt.jpg

    Crybabies: http://www.onepennysheet.com/wp-content/uploads/2009/03/gop20cry20baby-214x300.jpg

    I'd add more but then the filter would probably think I'm spamming.

  • Tom S (unverified)
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    Exit Oregon:

    Set!!!!

    Now please live up to your name, you useless spewer of disproven and counterproductive talking points.

  • Bill Bodden (unverified)
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    So when he says capital gains tax should be fixed, he's saying the kind of people who can afford to pay a little extra to address the State's problems, are people like him. He's putting his nation's interest before his own.

    Let me modify that slightly. He's showing some concern for the nation's interest because it is also in his interest to do so. The same applies to all of us. When we give some thought to the nation's interest and not just to our own short-term selfish interest it is our long-term interest and that of future generations.

  • Scott in Damascus (unverified)
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    Steve,

    The term "idiot butthead republican" is redundant on so many levels.

    Grammatically yours,

    Scott

  • Mike M (unverified)
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    One fix may already be in hand, and has been for quite awhile.

    Many Oregonians have 401K, 403b, or IRA accounts that hold stocks. The gains in these accounts are deferred until there are actual withdrawals; at that time, the distributions are treated as ordinary income, and taxed accordingly. There are no provisions for long-term capital gains.

    What Steve Packer suggests is that Oregon may want to look specifically at long-term capital gains related to investments in taxable trading accounts; ti.e. not within retirement accounts.

    Does anyone have any stats on capital gains in Oregon, broken down by taxable and retirement accounts? Is there a significant amount of revenue to gain by looking at how capital gains are treated in Oregon?

    Some of the preferential treatment for capital gains is already reduced by the fact that the deduction for Federal tax paid by Oregonians is already capped. This raises the effective income that is taxed by Oregon.

    On the federal side of things, the AMT also captures additional tax by reducing some of the benefit of employee stock options and grants. In some cases, it is possible that taxes may exceed actual realized gains. For AMT, the paper gain for some incentive stock options incurs an AMT liability even if the gain is not actually realized. Later, the underlying stock may decline and actually result in a significant loss.

    One other aspect of investment income is that it is not always recognized by Oregon when it comes to calculating benefits such as unemployment. Unemployment benefits are calculated based on past earned income. It is possible for unemployed people to collect unemployment benefits while trading stocks to supplement their income. Perhaps means testing should also be looked at by Oregon so that the truly needy are the ones receiving state benefits.

  • John (unverified)
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    im sure Steve's comments were very insightful but i didnt understand exactly what he was saying either. does he think cap gains should be taxed at a higher rate than ordinary income? is he proposing to do what Mass. did until the late 90s-that is taxing "unearned income" (interest, dividents, capital gains) at twice the rate "earned income" is taxed at?

    also, i have my own tax proposal id like to make. id like to abolish tuition at public colleges & universities and abolish fares on public/mass transit in Oregon. id propose buying down the tuition & fares by creating a Capital Stock Tax. This tax would apply to the capital stock on businesses incorporated in Oregon (corporations). capital stock is basically a corporations net worth. and lets say the rates of this tax would be anywhere from .1-1.5%. there are a handful of states that have this tax-my home state of Pa has it but has been slowly abolishing it for the last 12 or so yrs.

    so what do u guys think of these proposals?

  • Joshua Welch (unverified)
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    Steve Maurer:

    Love the tone of your post. Libs don't speak enough in moral terms and often give these corporate right-wingers far too much respect. Everyone knows exactly where you stand.

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    I expected a debate from my liberal friends who need some incentive to discuss this issue. I’d rather the discussion did not morph into anti-tax rhetoric. I do like the notion that we consider selfish interest insofar as it creates benefit for us all. And, I think a stable state revenue is important for Oregon.

    The Governor’s Revenue taskforce identified capital gains as the source of the volatility of Oregon’s revenue. Unfortunately, they did not study the issue sufficiently to recommend a solution and I think we should address the issue before we enter into another boom period.

    This issue and its solution should not be confused with the rainy day fund. The rainy day find and the kicker deal with the variance between a forecast and an actual. Even with a perfect forecast, the capital gains revenue will be cyclical and we should have some sort of long term smoothing.

    I’m certain there are lots of interesting ideas for smoothing this revenue stream. After all, the concept dates to before the Egyptians. The best solutions might even be bipartisan and we could show our good will to the people of Oregon with a serious proposal. And, with time we might even get legislation. However, we need lots of grassroots voices to be heard.

    I’d set aside the capital gains revenue, utilize historic revenue numbers to forecast an average and spend to this forecast. The excess would be retained for eventual short falls. The idea is radical but when repeated over several legislative sessions, I suspect we could have a bill.

    So, what are you going to say to your legislator? Will you help popularize the idea of smoothing capital gains revenue?

  • LT (unverified)
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    Once upon a time when Wayne Scott was Majority Leader, there were 2 capital gains tax cuts being discussed.

    Plan A was a bipartisan bill which paid for itself (the budget did not take a hit to pay for the changes).

    Plan B did not pay for itself (the budget took a hit) but by golly it had Wayne Scott's name on it.

    Guess which one died in committee and which one went to the House floor.

    There are people who would welcome a serious discussion along the lines of Plan A, but were made cynical by Scott's plan B.

    Steve, if you are willing to talk about a specific plan or want to know about the sponsors of Plan A (interesting bipartisan co-sponsors) that would be fine with me.

    But I don't do generic " we should talk about..." when it comes to taxes.

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    LT, The issue is reducing the volatility of our revenue. Partisan issues aside, we should have a spending commitment that is based on practical model of the real world. We need to smooth the revenue from capital gains regardless of how we tax them.

    I'm not sure why Plan A failed, but just being revenue neutral is not good enough.

  • LT (unverified)
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    "The issue is reducing the volatility of our revenue. Partisan issues aside, we should have a spending commitment that is based on practical model of the real world. "

    Steve, some people think Plan A was left to die in committee not because of issues but because of sheer orneriness---Scott was going to get Scott's bill to the floor, by golly!

    But about your quote:

    There are those of us who will discuss specifics but not generalities.

    Life out in the real world where most of us live is logistics, it is details, not generalities.

    Arranging a meeting with a friend by checking work schedules to see when it is convenient. When to go grocery shopping and what to buy. Most of us deal with details at work. Many of us work at jobs where we deal with others and are often called upon to solve problems.

    Some people even work with students helping them develop critical thinking skills.

    Using your quote in such an exercise might go something like this:

    A) "reducing the volatility of our revenue"

    1) Define revenue volatility. 2) Many think reducing revenue volatility would be a good thing. What are some steps we might take to do that? Is there more than one way of doing that? How would it be done--change of law? If so, how many votes would be required and from whom?

    B)"we should have a spending commitment that is based on practical model of the real world. "

    1) Define Spending committment Practical model *Real world

    2) Who decides what is practical?

    3) Who decides what the real world is like---a few powerful people, or the sort of folks who vote but do little else politically?

    The way Karen Minnis and Wayne Scott defined those terms was "whatever we say they mean".

    In a free country, no one is required to accept that, which is why they lost majority.

    But there are current legislators who sound like they are balking at defining such terms---thus sounding like the ivory tower types who don't want open public debate with the general population, because after all, they have the revealed truth!.

    Steve, you may have the greatest idea in the world, the single silver bullet which will solve all our budget problems without ever addressing the kicker or the out of state money which dominates too many ballot measure campaigns.

    But we will never know if your terms are not defined.

    Just because there are people in politics who say "that's the way things are done", that does not stop annoying people like me saying that there was a time in Oregon when defining terms, engaging in open debate with opponents and with the general public (see the recent Portland Kitzhaber v. Bradbury debate for the first, and Ron Wyden town hall meetings for the second) not stooping to spin, generalities, and propaganda were the way things were done in Oregon.

    Ever considered that might be why so many people don't register with major parties anymore?

  • Bill Bodden (unverified)
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    If we go to casinos in Las Vegas or elsewhere we risk money. If we win we can claim our winnings to be a reward for the risk we took, but income tax laws require that these winnings be taxed. This is a generally accepted practice.

    Investing is stocks is very much the same as betting in a casino so much so that many commentators refer to Wall Street as the big American casino. So what's the difference? Why should winnings in an official casino be taxed but not in the stock market which is a virtual casino in most cases?

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    LT, I'm talking about policy and not procedure. If you do not believe there is an inherent volatility in the stock market and a subsequent volatility in the capital gains revenue for Oregon, then we have nothing to talk about. If you do believe there is such volatility, then we should look for a procedure to balance our commitment for spending with a long term average for the revenue. Such a policy would not be difficult for a business as we have lots of historical data, but for a political decision, it will take a lot of us pushing.

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    Bill B, Interesting comparison. But, the basis (the bet) and the winnings are all in current dollars. I'm fully supportive of short term capital gains being taxed at the same rate as gambling. However, for long term gains, the basis is not in current dollars. I believe there is something inherently unfair about taxing gains attributable only to inflation.

    And, for me, encouraging Americans to own their own companies is not gambling. Letting the Chinese buy our debt is a way more disturbing bet to me.

  • LT (unverified)
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    I BELIEVE VOLATILITY IS A PROBLEM!

    I don't think that sentence solves anything.

    " If you do not believe there is an inherent volatility in the stock market and a subsequent volatility in the capital gains revenue for Oregon, then we have nothing to talk about"

    OK, if we implement your idea verbatim, stock market volatility will cease?

    I heard Ben Westlund speak last June. He spoke about how the state had a AA credit rating but there were 3 things keeping Oregon from having a AAA credit rating:

    *Oregon's volatile tax structure

    *Oregon's permissive initiative system--- big out of state money can come in, put a measure on the ballot with paid signature gatherers, and potentially blow a hole in the state budget.

    *"Oregon's unique, and uniquely bad, kicker law".

    THAT is the level of specifics I am looking for.

    You respond with sentences like "Such a policy would not be difficult for a business as we have lots of historical data, but for a political decision, it will take a lot of us pushing."

    What exactly do you mean by "lots of pushing"? Lobbying legislators to pass your idea?

    What if they ask specific questions like I have asked?

    What if they say they will send the idea to LRO and ask for an evaluation?

    Call me dense, call me "not believing there is volatlity", but I have no clue what you mean by

    "we should look for a procedure to balance our commitment for spending with a long term average for the revenue"

    You sound like an old friend who used to speak in such vague terms and sometimes in discussions would get very frustrated and say "I ask you a general question and you come back at me with specific details".

    Maybe it is a difference of point of view. I see the world from a detail-oriented point of view. The jobs I have worked in all required attention to detail.

    If you have a specific idea, let's hear it.

    If not, I'd like to suggest that any discussion of capital gains taxes must be more specific than you have been so far.

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    LT, We are still struggling with the premise. Are you resisting the assertion that Oregon's capital gains revenue is volatile?

    If yes, should we implement a procedure to establish spendable annual revenue based on an historical average?

  • LT (unverified)
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    "Are you resisting the assertion that Oregon's capital gains revenue is volatile? "

    No, I resist the premise that if we all hold hands and say "Oregon's capital gains revenue is volatile", anything will change.

    It is the same mentality which leads me to agree with the commenter who asked the Bradbury supporters what legislators had lined up to support the Bradbury idea being discussed.

    My challenge to you.

    Complete these sentences:

    "Oregon's capital gains revenue is volatile, and the proof of that is___",

    "In order to end the volatility, the following steps should be followed: 1) 2) 3) 4) etc."

    I am concerned with nuts and bolts.

    I could say THE KICKER SHOULD BE REFORMED.

    That would not specify which reform proposal is better, whether we need to have favorable poll results before we even start a serious discussion, or which facts the general public deserves to know (do kicker checks go out of state and if so why, what is the amount of the largest kicker checks, for instance) and whether my state rep. has a good idea in her proposal to change the way the kicker is calculated.

    If you think acceptance of your general premise solves all problems, good luck selling that point of view to a legislator--esp. a legislator on a committee which would hear such an idea should it become a bill.

    Or were you thinking of the ballot measure route for your idea instead?

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    Chuck, you are way too predictable. The statistics are much less interesting that a values debate.

    You opinion piece tells us we need the money. That’s fine. But, the issue is to create a policy to deal with the cyclical nature of this revenue. I’d have expected you to have an insightful opinion about that. If you really want to talk about the tax rate, then we have to talk about fairness.

    For now, do you agree that the cyclical nature of the revenue is a problem and policy for a stable spending budget is worth solving?

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    LT, I like details as well. But we have not agreed there is a problem so discussions of solutions are premature. Stay in problem space for a while.

    And, I already miss Ben. A meeting with him might have empowered us with lots of data for possible solutions. I wish I knew Ted, but I don't.

  • Bill Bodden (unverified)
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    "And, for me, encouraging Americans to own their own companies is not gambling. "

    Steve: I was deliberately not absolute in my position. There are many instance where investments are made to promote a business, but there are the others, probably a majority, where people are not so much concerned with the business whose stock they buy as they are whether it will gain in price and they can cash in and make a profit. What is needed is a way of identifying legitimate business investments and the others that are casino plays.

  • Humphrey (unverified)
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    Revenue volatility isn't a problem if you have a good rainy day fund.

    I think the question we should be asking is 'what is the fairest way to raise the revenue we need?' If the fairest way relies on volatile taxes such as income and capital gains, fine. We'll put extra money away in good years to use in the bad years.

  • LT (unverified)
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    " But we have not agreed there is a problem so discussions of solutions are premature"???

    Posted by: Humphrey | Mar 18, 2010 10:06:54 AM you are a man after mine own heart on this matter.

    Steve, Ben was discussing what to do about volatility last year, so no, I will not "Stay in problem space for a while." Ben was discussing volatility solutions last June (maybe not the ones you want, but solutions), so it is wrong to say such discussions are premature.

    BTW, I have told Wheeler and Metsger that I will not be involved in their primary. I will wait until late April or early May and decide which one reminds me most of Ben and vote accordingly.

    We deserve the solution-oriented, intellectually rigorous, political breath of fresh air we saw from Ben in our new state treasurer.

    High bar to meet? Sure. But what we deserve.

  • Terry Parker (unverified)
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    The tax on capital gains definitely needs to be not only revised, but the taxes on the first $25,000.of capital gains need to be eliminated for individuals earning less that $125,000 and couples earning less than $250,000. This is the way only to spur investment in our economy from the working class and retirees. It also spreads the wealth away from Wall Street investors.

    Additionally, the legislators and budget writers in Salem need to replace the present budget processes with a zero based budgeting process, make actual cuts instead of just cuts to the increases, and eliminate all line items that attempt to implement social engineering.

  • LT (unverified)
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    Terry, I agree with your first paragraph.

    Your second paragraph, however.....

    "make actual cuts instead of just cuts to the increases, and eliminate all line items that attempt to implement social engineering. "

    My guess is that there are current Ways and Means members who would dispute there were no "actual cuts", incl. some Republicans.

    As far as "social engineering", you will never see any change on that score until there is a majority in the legislature who agree with your definition of "social engineering"---whatever that definition may be.

  • Bill Holmer (unverified)
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    Tax policy makers have to make a decision: Do you want the capital gains tax to be fair, or do you want to maximize the revenue from the capital gains tax? If you want the capital gains tax to be fair, then capital gains should be taxed at the same rate, if not more, than the rate on wages and salaries.

    If you want to maximize revenues from the capital gains tax, then the rate needs to be set low enough to make investors willing to recognize their capital gains, in spite of the capital gains tax. If you raise the capital gains tax rate, it will likely result in a loss of revenue.

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    Humphrey, I’ve avoided the use of “rainy day fund” because it is entangled in the discussion of kicker reform. The kicker deals with variance between forecast and actuals. This variance will be present regardless of the underlying mechanisms for revenue, and since the kicker law is not symmetric, we need a method of correcting optimistic forecasts as we as pessimistic forecasts.

    Kicker reform is one of my personal top priorities for 2011. I and several others are planning a legislative action day with visits to our legislators in Salem. As we get closer to a mutually agreeable bill, it would be great to have more of you join us.

    And, we might even achieve stable school funding, the real purpose for a predictable budget.

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    Bill H, You and several others have suggested fairness as a metric for judging the capital gains tax. I am much more compelled by discussions of fairness than by fear of change or judgment of worthiness. Fairness is a slippery term that just does not easily succumb to logic.

    The debate on paying for our government has continued since inception of the country. As a nation we seem to be settling on a graduated income tax as the fairest of taxes. I certainly have come to believe we should base our government revenue on income. Based on that belief, Oregon is one of the fairest states in the nation.

    Like Tom Hartmann, I’d roll back both the Bush and the Regan tax cuts to return us to a steeper graduation. And, I would tie the brackets to both inflation and to an index of the economic health of the lowest paid. Oregon’s tax brackets should model this graduation. That is never going to happen but we could dream.

    Income from wages by definition is valued in current dollars and most of us can calculate the burden. Capital gains, however, are problematic because the basis is not in current dollars. Taxing people who attempt to protect their savings from inflation seems unfair to me. A fair tax would be based on current dollar earnings, just as for wages, and this tax would be on earnings we direct to something other than a like-kind investment. If you take your money out of your stocks to buy anything that the rest of us have to pay with post tax dollars, then the earnings are to be taxed at the same rate as wages.

    As Mike M suggested, the Feds have tried to create policies to help people save. The 401, the IRA and the Roth are examples. All of these suffer from any tax relief from inflation. And, they create tax issues with pre verses post tax dollars. Combined, the issues make one’s head hurt.

    I’d treat short term gains just like income and tax it at the rate of income. For long term, I’d compensate for inflation and for like-kind transfers. A generalized roth-like account for our investment savings seems like a reasonable approach and might even get us back to a nation with a savings account and not a credit card balance.

  • Bill Holmer (unverified)
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    Like Tom Hartmann, I’d roll back both the Bush and the Reagan tax cuts to return us to a steeper graduation.

    Contrary to the conventional misunderstanding, the facts are that the Bush and Reagan tax cuts made the federal income tax more progressive, not less. In 2004, the top 1% paid 36% of all federal income taxes, as compared with only 19% in 1980. Are you really proposing reducing the share of income taxes paid by the top 1%?

  • LT (unverified)
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    "I’d treat short term gains just like income and tax it at the rate of income."

    Once upon a time there was a proposal (to encourage long term investment) which would have taxed any capital gain from something held less than a week at like 90%, something held less than 6 months at maybe 80%, something held a year at a smaller percentage, and something held for many years at a very small rate.

    That is a thoughtful proposal.

    "We must cut capital gains taxes" with no details is just a slogan.

  • Zarathustra (unverified)
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    This shows how right wing Americans are. TEA people want every tax discussed, and every tax gets discussed. Meanwhile progressives have wanted to discuss population policy for decades and it never gets a word.

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    The problem is not revenue volatility (although revenue is volatile: volatility is the variance or spread from the long-term mean rate of revenue growth). Volatility is simply another way of saying we have progressive state revenue structure. The problem is spending volatility, putting it on a stable growth path.

    Steve proposes:

    "This issue and its solution should not be confused with the rainy day fund. The rainy day find and the kicker deal with the variance between a forecast and an actual. Even with a perfect forecast, the capital gains revenue will be cyclical and we should have some sort of long term smoothing.

    "I’d set aside the capital gains revenue, utilize historic revenue numbers to forecast an average and spend to this forecast. The excess would be retained for eventual short falls."

    That is a solution to the problem that is largely workable and feasible, meaning capable of being done. Moreover, it would also go a long way toward mitigating the effects of the personal income tax kicker.

  • Kurt Hagadakis (unverified)
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    Posted by: Fred Thompson | Mar 19, 2010 8:13:42 PM

    The problem is not revenue volatility

    Which is a commonly cited reason why a sales tax is not a good idea.

  • LT (unverified)
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    "That is a solution to the problem that is largely workable and feasible, meaning capable of being done. Moreover, it would also go a long way toward mitigating the effects of the personal income tax kicker. "

    Because an idea is feasible theoretically, the actual people in the legislature in any given year will act that way? "utilize historic revenue numbers to forecast an average and spend to this forecast"?

    This debate reminds me of a debate years ago when Dan Doyle had proposed the "bucket plan" (complex and deserves to be forgotten, involved a spending limit).

    There was a committee hearing where Doyle and his former ally Rep. Close were debating his plan. It was a time when the price of fuel --incl. school bus fuel--was going up faster than predicted.

    Most intelligent question I ever heard Rep. Close ask was her question to Doyle. How would he deal with the rising cost of bus fuel---require schools to cut something else out of their budget? "Is this a proposal going forward or a historical construct" (if I recall the quote correctly).

    In our legislative system, budget decisions are made, line item by line item.

    Who exactly is going to bring about the change from the current system? Theoriticians? Are candidates going to run on this idea and if they win claim a mandate?

    There are folks like me (and some people I know) who live by the slogan that life is logistics.

    This is just theory.

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    LT: They spend to the forecast right now. The state constitution requires the governor to submit and the legislature to enact a balanced budget based on the revenue forecast. What Steve is proposing is to change the way we forecast revenue. This is a very good idea. It is what they do in Chile and it works for them in a revenue environment that is even more volatile than Oregon's. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1548724

  • LT (unverified)
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    They spend to the revenue forecast given on specific dates by the state economist.

    That is different from "utilize historic revenue numbers to forecast an average and spend to this forecast".

    But if anyone wants to campaign on "Oregon needs to change their revenue forecast to the one Chile uses so effectively", be my guest.

    Like any other idea, it goes nowhere unless there are at least 31 votes in the House and 16 in the Senate.

    Anything else is just part of an online debate.

  • Mike M (unverified)
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    If Oregon puts together a budget that always spends every dollar of the forecasted revenue, we will always be in a world of hurt when revenues don't meet the forecast.

    This "peak detecting" budget model is not sustainable when a downturn occurs.

    One other comment worth repeating: short term capital realized gains are always taxed as ordinary income, after offsets from previous capital losses (short and long term). Long term capital gains have historically been taxed at a lower rate to encourage savings; to encourage investments.

    The volatility discussed here is simple: in good times, the tax revenues are flush; in dire times, revenues are reduced. We can't have a sustainable state budget that builds in permanent spending requirements that cannot be scaled back when times are tough.

    Possible solution: build a budget that is based on some constants that don't change so readily - property values and earned income. Combine that with a formula to build the rainy day funds when revenues exceed the forecast - and balance the rainy day fund building with some sort of kicker.

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    Mike M: We don't want to scale back state spending when times are tough (it's bad fiscal policy and spending volatility harms government performance); the only way to keep that from happening is avoid unsustainable spending when times are flush (neither of which are predictable ex ante). One way to do that is to base the revenue forecast on the long term growth trend (geometric mean growth rate) another is to do it is to follow Steve's proposal.

    LT: Steve's proposal was implicitly endorsed by the Joint Legislative Task Force on Revenue Restructuring (or at least something like it). Both proposals were under discussion in the the Gov's office when the Leg leadership announced they weren't willing to touch the issue during the special session.

  • Mike M (unverified)
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    Fred: I agree with you. Perhaps I did not state it well.

    We do have a habit of putting in place permanent spending when the state coffers are flush (2007 is the most recent example). Setting us up for the current quandary, where an actual spending increase is viewed as a cut since the spending cannot grow at the wished for rate.

    Basing a budget solely on immediate forecasts leads us into the boom-bust problems we have experienced in recent years.

    Perhaps putting together a budget with fixed and variable spending with a priority to certain services. This will become more and more important if revenues flatten or actually decline. Even with temporary measures like 66/67, there are still issues if revenues don't meet forecast.

  • Galen (unverified)
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    I am just happy I don't make enough money any more to worry about all these new taxes. I don't really care to make more at this point either. Not worth the risk of losing just to give away "my fair share once I win one time in my risk. I bet I am not alone.

  • LT (unverified)
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    "LT: Steve's proposal was implicitly endorsed by the Joint Legislative Task Force on Revenue Restructuring (or at least something like it). "

    And just like those proposals and the Pub. Comm. on the Legislature proposals, they don't go anywhere until candidates discuss them, legislators introduce them as bills, etc.

    To my mind, one of Kate Brown's great moments as a Sec. of State candidate was when she brought up one of the PCOL proposals in a candidate debate. She thought it was dumb. I thought it was a good idea. But at least she brought it up and talked about it publicly.

    Blog debates are not the real world. Go find yourself a candidate willing to campaign on your idea.

    "Both proposals were under discussion in the the Gov's office when the Leg leadership announced they weren't willing to touch the issue during the special session."

    Legislative leadership made the decision that they would only discuss top priorities during the special session. Agree or disagree, they did vote on their priorities and adjourn at the end of Feb. as had been their plan.

    The candidates for Gov. and legislature should be discussing these ideas publicly, along with kicker reform. I have heard a few diff. kicker reform proposals discussed generally. But the only one I have heard discussed by a legislator in a public forum in 2010 is when my Republican state rep. told a town hall meeting after the Feb. session that she believes in the kicker but thinks the way it is calculated needs to be changed.

    Are we going to see Democrats debating these issues publicly in this election year? Or do they have to see good poll results and the start of building a coalition before they will grace us with their views on these issues?

  • Douglas K. (unverified)
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    Why not tax capital gains at the same rate as earned income, but index the basis at a rate 1% higher than inflation? That would have the effect of a lower effective tax on capital gains when you hold an asset for a long time (thus, creating an incentive to invest for the long haul), but still capture the full income gained from short-term speculation.

  • Mike M (unverified)
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    Douglas,

    Short term capital gains are already taxed at the same rate as earned income. Some more exotic investment vehicles are always treated as short-term gains, even if held for longer than a year, so are always already subject to the earned income tax rate. Most stock options granted in current times are "non-qualified" and are immediately subject to ordinary income tax when exercised, even if the underlying stock is held (in other words, the basis is adjusted when exercised, and the difference between the grant price and the stock price at exercise is treated as earned income).

    If the basis is adjusted for inflation at any rate, the tax due may disappear entirely if the asset is held long enough or high inflation rates rear their ugly head as they are expected to in the next decade.

    At the fed level, there have been proposals to add a transaction tax on trading.

    Also, in the healthcare reform bill that is in the news, there is a 3.8% tax on realized capital gains, with no special rate for long term gains. Some interpretations of this provision is that the 3.8% may be for unrealized gains, so there may need to be mark-to-market calculations each year - a complexity that most people cannot deal with accurately.

    All in all, I understand the attraction of taxing gains (of course, offset by losses, too). As the original question was proposed, what is a fair rate, and how should investors and savers be provided with incentives?

  • Douglas K. (unverified)
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    If the basis is adjusted for inflation at any rate, the tax due may disappear entirely if the asset is held long enough or high inflation rates rear their ugly head as they are expected to in the next decade.

    I'd expect that. If inflation eats up your entire gain, you shouldn't be taxed on it, because you didn't actually make any money. On the other hand, if you have assets that really do appreciate, you should be able to sell them for a profit even after taking inflation into account.

  • Tim McCafferty (unverified)
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    I have been to busy to have caught this old convoluted market hubbub put out by wealthy people living off the returns of money making money.

    As though the money that has already been taxed makes money earning interest or, dividends should not be taxed agian, it would be double taxation. This is the arguments that were made in the last Great Depression. I'm sure the Robber Barons were sure if they could make a buck on American suffarage, this would be good for all some day.

    I think if we allow so few to sit on so much of the economy's capital, or park huge chunks of American resources in off shore accounts from American taxation, we strangle the possibilities of real job producing progress for the vast majority of Americans. A good JOB.

    The proposition is this, if we keep falling into this "strangle government" with tax cuts to the wealthy and corporations, and deregulate banking and capital distribution to just trust the ones with all the wealth, we willingly let a few greedy wealthy drag America into the abyss of another Great Depression. I'll note that this is not a overly dramatic scenario, but a frighteningly real possiblity.

    <h2>My humble opinion, humble to be sure, and yet I know I'm not alone in seeing what I see.</h2>
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