01/27/2012 01:58 pm ET Updated Mar 28, 2012

Think Again: "As Ronald Reagan Said... Oh Never Mind"

Conservative media outlets are falling all over themselves looking for the "true" heir to Ronald Reagan. (For a telling example see here.) But one area in which pretty much all conservatives today are completely off base when it comes to Reaganism is capital-gains taxation.

Take David Frum, who has developed a reputation of late as being among the most thoughtful of prominent conservative commentators. He has twice recently made the conservative case for minimal capital-gains taxation here and here. In doing so, he defends a position held by virtually every conservative (and would-be Reaganite) in America.

Thing is, Ronald Reagan actually raised capital-gains taxes.

As the New York Times's Floyd Norris notes,

For most of the history of income taxes in America, long-term capital gains --defined at different times as investments held for minimum periods of as little as six months and as long as 10 years -- have been taxed at substantially lower rates than top ordinary income tax rates. But there was, in fact, only one time that capital gains were taxed at the same rates that were paid by people who earned their money by working. That was during the years 1988 to 1990, as a result of the Tax Reform Act of 1986 -- a law championed by President Ronald Reagan.

This constituted a 30-percent increase in their tax rate at the time. There were good reasons for this, though one is hard-pressed to argue that Reagan knew what they were at the time. For instance, as Greg Anrig notes (care of a recent column by Paul Krugman):

The tax-favored treatment of capital gains is a notorious source of complexity in the tax code, diverting the energies of highly paid accountants and lawyers into wasteful efforts to shelter the incomes of wealthy clients from taxes. The elaborate tax forms known as Schedule D ("Capital Gains and Losses") and Form 8949 ("Sales and Other Dispositions of Capital Assets") provide a superficial glimpse at how the differential tax treatment of capital gains can suck up enormous quantities of time and money for the well-heeled and their tax pros. But much more costly and wasteful than the tedious forms are the strategic energies engaged in manipulating income flowing to the wealthy in ways that minimize tax liabilities.

Anrig cites a study by the Internal Revenue Service that finds "the primary source of capital gains income has shifted from stocks to 'pass-through' entities (gains on assets sold by partnerships, S-corporations, and estates and trusts)," a development that significantly benefits money managers who oversee private-equity partnerships. But while these efforts have demanded "an enormous investment of brainpower, administrative work, and other energy that has profited individuals engaged in those activities," there has been no "discernable payoff to the rest of society. Little of that unproductive work would continue if capital gains were taxed at the same rates as earnings from work."

One undeniable effect of the low rate for capital gains has been a vast acceleration of the "Hood Robin" legislative process, whereby lobbyists compel Congress to take from the poor and the middle class and give to the rich. "Wall Street loves the preferential capital gains rate. All of America's 20- or 30 million wealthy small investors love capital gains rates," economist Marty Sullivan explained to two Washington Post writers. "It's just a tremendously popular item with political contributors. It's something that directly impacts every wealthy household in America."

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