I Don't Think This Will Pass Congress And We're Going To Make Real Sure It Doesn't!

ritholtz  |  Spoiler alert: Forget the 40% capital gains rate — its DOA, merely misdirection, designed to distract from the real show. My best deductive reasoning leads me to conclude the administration has decided that the 1% have amassed so much money and power, that they deserve their own (higher) tax bracket.

That is the philosophy behind the new cap gains proposal: Treat the top 1% as unique, and tax them accordingly.

Allow me to share my thinking about the proposed doubling of the capital gains tax rate to 40%. I am not going to weigh in on whether or not I support it — thats not especially relevant — but rather, how we got here, and what might be going on behind the scenes, and what is more likely to occur (if anytrhing). Contrary to some of the hyperbolic hysteria you may have seen on social media, there is a method to the madness.

But first, my priors: Following World War Two, the United States enjoyed an unprecedented expansion of the middle class. Corporate CEOs earned about 25 times what the average worker made; jobs with good benefits were plentiful, wages rose regularly. Education and healthcare was affordable.

That began to change when Stagflation took root in the 1970s; change accelerated under President Reagan as tax rates were slashed. Not long after that, audits and enforcements at the IRS began to decrease. Capital began to outpace Labor – modestly at first, and then more significantly. In the 1990s, President Clinton introduced a tax change intended to limit executive pay – but it had the exact opposite effect, shifting more of their compensation from wages to stock options. This led to the creation of vast fortunes including an increased number of millionaires and billionaires. It was the law of unintended consequences writ large. That was before President Trump cut the Corporate tax rate in 2017.

Today, Corporate CEOs earned about 200+ times what the average worker makes (or 320x or whatever); good jobs with good wages and benefits are much less plentiful, Education and healthcare are unaffordable.

Hence, that is from whence my analysis begins. I believe that strategically, the proposed 40% is a misdirection, and a brilliant one at that. It is not at all what this is truly about.