Tears for Obama, a Bailout for “Investors”

Seven of us watched the inauguration of Barack Obama, and the tissues came out in the apartment. So much to cry over: a coming, a going, a national cleansing marked by the booming of the cannons. To say nothing of an onrushing bailout that could be as big as TARP’s $700 billion.

Every spring, thanks to a generous tax code provision, the Treasury picks up part of the tab for losing bets on Wall Street. Given last year’s historic plunge, these personal bailouts could rival that $700 billion—and for investors, there’s no dollar cap or cut-off date.

It all adds up to a fiscal hit on the Obama Administration. No matter how large the losses realized in 2008, no matter how long it takes to recoup, Uncle Sam will be sharing the pain. Deeply sharing: up to 35 percent depending on the loser’s tax bracket, or 39.6 percent if Obama ends the Bush tax cuts for higher-income Americans.

Capital loss offsets are the tax code provision that soothes investor wounds. When the year’s trades are reported on tax returns, losses offset taxable gains dollar-for-dollar. If net losses exceed gains, the loss offsets taxable income—by up to $3,000—and provides another tax saving.

Offsets never lose their tax-reducing power. Losses greater than $3,000 (as last year’s probably were) are carried forward indefinitely until they’re used up.

At 15 percent, the tax on long-term capital gains is low compared to the rate on ordinary income like wages. With capital loss offsets, the deal is even sweeter on the downside. While gains are taxed at less than half the top rate, losses are written off at 100 percent across the board. Could losing come any closer to winning?

Yes, say Senator John McCain and Michael Boskin, a former chairman of the Council of Economic Advisers. Senator McCain has proposed raising the capital loss offset against ordinary income from $3,000 to $15,000 per-year for 2008 and 2009. Boskin would up the number to $20,000.

All of which raises some interesting questions. Who profits from these write-offs? Is there good reason for the government (read: taxpayers) to subsidize investment losses? Might the tax system be fairer, and rates perhaps lower, if these subsidies were curbed or even ended?

The first question is easy. Roughly 50 percent of Americans own no stocks, so offsets hold nothing for them. Of the half who do own stocks, most have their portfolios in tax-sheltered retirement accounts. They don’t get those write-offs, either.

That leaves a fairly narrow layer, those affluent enough to have non-retirement stock portfolios. Putting it another way, the benefits of capital loss offsets flow solely to those who already have ample capital.

As to whether subsidies for investors are a sound government policy, sure they are—but it’s foolish to hand out tax breaks just for playing the market. Real investors, a thimbleful of the total, put seed money into initial public offerings (IPOs) and follow-on offerings. They grow jobs and grow businesses. The rest of us play the game at the tables down on Wall Street: we grow portfolios (if we’re lucky), nothing more. Real investors have a strong claim to tax breaks. “Investors” have a frail claim, and it’s time that Congress caught on.

Tax fairness—as always—is in the eye of the 1040 filer. Still, facts matter. Capital loss offsets benefit the few at the expense of the many. Like all tax deductions, they’re paid for by taxpayers in the aggregate—through higher rates, fewer government services, or both. Taxes would be fairer without offsets. Short of repeal, Congress could set a dollar or percentage limit (a form of which was on the books years ago). At the least, the offset against ordinary income should be stricken.

Except for real investors, who are 100 percent deserving of 100 percent offsets (and an income offset too). If they lose more than $3,000 in a year, Michael Boskin’s $20,000 income offset is a starting point.

Back to President Obama, whose Tax Fairness Plan during the campaign opened on this note: “For decades, America has been victim to an anti-tax sentiment that has led to tax cuts that favor wealth, not work.” Two prime examples are offsets and higher taxes on wages than on capital gains. When Congress finally takes up tax reform, Obama’s instinct for fairness should be his one true guide.

Gerald E. Scorse helped pass a bill that tightens the rules for reporting capital gains. He is a member of Responsible Wealth, an advocacy group for economic fairness. He can be reached at: gscorse@rcn.com. Read other articles by Gerald.

5 comments on this article so far ...

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  1. Don Hawkins said on January 31st, 2009 at 4:24pm #

    What will do the trick? Here’s part of the solution.

    (1) There must be a tax at the mine or port of entry, the first sale of oil, gas and coal, so every direct and indirect
    use of the fuel is affected. Anything less means that the reduction of demand for the fuel will make it cheaper
    for some uses; e.g., people will start burning coal in their stoves. Peter Barnes’ idea to push the cap upstream to
    the extent possible is not adequate nor is a ‘gas tax’ suggested by NY Times and others. A comprehensive
    approach is needed.
    (2) “Cap & trade & dividend” creates Wall Street millionaires and complex bureaucracy. The public is fed up
    with that – rightly so. A single carbon tax rate can be adjusted upward affecting all activities appropriately.
    With 100% dividend the public will allow a carbon price adequate to the job, i.e., helping us move to the postfossil-
    fuel world.
    (3) Supply ‘caps’ cannot yield a really big reduction because of the weapon: ‘shortages’. All a utility has to say
    is ‘blackout coming’ and politicians and public have to cave in – we are not going to have the lights turned out.
    Will the public allow a high enough tax rate? Yes, dividends will exceed tax for most people concerned about
    their bills.
    (4) A tax is not sufficient. All other measures, such as building codes, are needed. But with millions of
    buildings, all construction codes and operations cannot be enforced. A rising carbon price provides effective
    enforcement.
    (5) Wouldn’t it be cheaper to let people burn the dirtiest fuel? No. The clean future that we aim for, including
    more efficient energy use, is not more expensive. For example, you may have read about passively heated
    homes that require little energy and increase construction costs only several percent. Such possibilities remain
    the oddball (with high price tag), not the standard construction, unless the government adopts policies that make
    things happen. James Hansen

    What are your thoughts on what James Hansen wrote that not many want to face.

  2. Don Hawkins said on January 31st, 2009 at 4:46pm #

    The fight will be on in the Senate next week and will anything that approaches reason on the problems we all face be in that fight, no. More band-aids and talk. During World War Two the economy was changed over quickly and could be done again. In the States GM could make electric cars and switch big machinery to natural gas and build wind turbines and help with low-loss power lines that will be needed for solar and wind and geothermal and solar thermal and keep people out of soup lines and that’s just one company.

  3. Don Hawkins said on February 1st, 2009 at 10:02am #

    Here’s one idea. Get organized school buses any bus you can find the entire State of Michigan DC in front of The Capital one voice. The message get it together people it’s time to start using reason work together.

    Just sent that to the Detroit Free Press. Maybe we can get one State at a time.

  4. Dr Radius said on February 1st, 2009 at 3:46pm #

    Obama wants to give the Social Security Administration 65 million dollars for new computers as part of a bailout bill to help the economy and ‘create jobs’. Social Security is the biggest Ponzi scheme in the history of the planet, and this guy is now going to flush some of my income tax down this drain. I have been a forced investor in Social Security for my whole life, get a paper letter in the mail from the govt every year saying I am fully vested for the last few years, have never been able to opt out of this ‘service’, old people cannot even refuse to get their payments even if they are millionaires; they have raised the rate of retirement twice without a vote of the people, and Social Security will likely not be able to pay me anything meaningful or possibly at all by 2021 (lack of funding, size of rolls, and adjustment to inflation issues).

    This is really OK as the Medicare Hospital Insurance trust fund will run out of assets by 2019.

    I am also pretty sure that a flat tax for all US workers and companies doing business in the US would a. make more money than the current system and b. be cheaper to administrate and enforce.

    Focus on the existing entitlement packages not the new ones; like TARP.

  5. Gerald Scorse said on February 4th, 2009 at 11:35am #

    I answered the last comment with an email directly to Dr. Radius. Unfortunately I didn’t save a copy, but my reply was a strong defense of Social Security. It’s a godsend for seniors, and the only reliable source or retirement security for the American middle class.