Putting the Spotlight on the Covert Subsidy of Wall Street

Wall Street is back in the news.They went away for awhile, taking a backseat to gas prices and budget proposals. They preferred it that way. They make more money when no one's paying attention.But when you're too big to fail, you're too big to hide.First, there was the announcement that JP Morgan had lost at least $2 billion in derivatives trading. Then came the Obama campaign's attacks on Mitt Romney's record of cutting jobs at Bain Capital, followed by the unlikely retort by Cory Booker, the Democratic Mayor of Newark, New Jersey.But it is not enough to ask what good Wall Street does. We must go one step further: Is Wall Street so valuable -- is its output so beneficial -- that we must subsidize it?In the wake of the worst financial crisis since the Great Depression, it's hard to make that case. But that hasn't stopped the government from giving Wall Street a bonus on top of every dollar they earn.They don't call it a "bonus," but that's what it is. Wall Street pays a lower tax rate -- 15 percent -- on every investment it cashes in than it would pay if that money were taxed like ordinary income. This "capital gains tax rate" is the lowest it's been since the Great Depression.When George W. Bush got Congress to lower this rate from 20 percent to 15 percent in 2003, it was supposed to encourage people to save and invest more, thus increasing future economic growth.But nothing of the sort happened."I have worked with investors for 60 years," said Warren Buffet, "and I have yet to see anyone -- not even when capital gains rates were 39.9 percent in 1976-77 -- shy away from a sensible investment because of the tax rate on the potential gain."Capital gains taxes have been falling for twenty years, from 28 percent in 1987 to 15 percent in 2007, yet the saving rate has plummeted over those same years.In fact, the years following the 2003 tax cut were part of the most dismal economic expansion in postwar history. Output growth, job creation, poverty reduction, and investment were all below average, if not all-time lows.Clearly, low capital gains taxes did not lead to the prosperity that was promised.This conclusion isn't restricted to one decade. From 1950 to 2011, the capital gains tax rate has been positively correlated with economic growth, meaning higher taxes have been associated with faster growth. Even when you compare economic growth occurring several years after the tax rate changed, there's still no significant negative relationship.Yet this tax break persists, costing the government $100 billion every year (when combined with the loss from the same low tax rate applied to corporate dividends).Where does this $100 billion go?$70 billion of it goes to the richest 5 percent of households. Half of all capital gains income goes to the top 0.1 percent of households. That means that a mere 114,000 households receive a $50 billion subsidy from the government every year.And it would be so easy to fix. Here's how it would work...If you're in the bottom 20 percent, you'd pay an extra $1.That's right. Just one dollar.If you're in the next 20 percent, you'd pay $2. Seriously. Only two dollars.If you're in the middle 20 percent, you'd pay $6. That's it. The average American, the precious middle class, would pay only six more dollars.If you're in the next 20 percent, you'd pay $30. On a six-figure salary, I think you can afford to give up thirty bucks.And those are just the average tax increases. Of those bottom 80 percent of households, 9 in 10 would experience no tax increase whatsoever.Cory Booker says this debate is a "distraction," but nothing could be further from the truth -- $100 billion is too big to ignore. The spotlight is back where it belongs. This time, let's keep it there.==========This op-ed was published in yesterday's South Florida Sun-Sentinel.