Thursday, January 26, 2012

A Quick Note about the “Benefits of lowering the capital gains tax.

The argument in favor of lowering the cap gains tax because, in the past, it has shown to result in an increase in government revenues, is faulty on its premise and in its time horizon.

First, there are a wide variety of reasons why someone sells a capital asset. I am not arguing that, in the past, IRS collections have gone up after a decrease in the rate. But it's not about capital generations, new jobs, and all the nonsense behind the arguments. It’s because, with a lower rate, the value of your asset went up in the moment, and you are more likely to sell, which sets off a higher rate of collections.

The problem, which most economists make, is that they fail to look beyond what happens after the first year as far as collections. They also fail to see that capital gains collections are subject to countless variables other than the tax rate, perhaps, above all, the stock market.

But talk is talk. Below are two tables showing the effect of two recent reductions in the cap gains tax rate. The first table shows the rate of increase or decrease in percentage terms in IRS cap tax collections. The other shows the change in GDP as a proxy for the multivariate elements that go into capital gains tax collections.

All changes to IRS revenue and GDP occur one year after the tax act.

Long term capital gains tax rate       GDP         IRS Collections

Previous      New   Year        Percentage Δ          Percentage Δ

                             1996                     4%                   4.5%

28%  20% passed in 1997                    5%                     4.4

in effect                 1998                     4%                     4.8

                             1999                      5%                    4.1

                              2000                     4%                     1.1

                              2001                      1%                    1.8

                              2002                     2%                    2.5

20%  15% passed in 2003                      3%                    3.5

in effect                  2004                      4%                      3.1

                              2005                       3%                      2.7

                               2006                     3%                       1.9

                              2007                     2%                       -0.3

                              2008                     -3%                       -3.5

                             2009                      -4%                        3.0

                             2010                       3%                          3%

Sources: Congressional Budget Office

Bureau of Economic Analysis

Consider years 1996, 1997, and 2003. There were no tax policy changes that went into effect in these years. And yet, the increases in each of these years are among the highest in the table. More importantly, look at the years AFTER the first year of the tax cut. The best example is the cut passed in 2003 and in effect in 2004. In 2004, collections did rise by 4.1%. Then look at the next four years—so much for the long-term impact of a one-time change in the capital tax rate.

Thursday, January 19, 2012

When the price you pay isn't the price you pay in Massachusetts

Seems like there’s been a surprise waiting for a few cellphone purchasers these days in Massachusetts. In the infinite wisdom and most-likely unconstitutional action of the Department of Revenue, when you purchase your next cell phone, you won’t pay tax on the price offered. No, you will pay on the “full wholesale price.” We all know that the purchase of a cellphone is a bundled purchase. The retailers give you a discount on the phone but it comes with an obligatory contract, on which your monthly service charge is heavily taxed by the state.

Seems like the Department of Revenue in a “Directive” dated April 29, 2011, forced the seller of a cellphone which included a bundled package of services, to tax the phone itself at “full wholesale value.” Of course, they did not define the wholesale value. The Department of Revenue basically argues that the price of an object or service sold is not the final sales price, even though the bundled service is taxable. Nothing like turning over a few centuries of the nature of sales and negotiations.

When I go to Macy’s and a sweater has been marked down 50%, with the original and reduced rate shown on the price tag, I have never been taxed on the higher price. Nor have I been forced to sign a contract to wear the sweater, paying Macy’s on a monthly basis. When I go to purchase a new car and the sales price invariably comes in below the original asking price, I have never been taxed on the original sales price. And, no, I don’t have to pay General Motors a monthly fee to drive the car. The world has been and is ruled by fair market price determined by the actual sales price at the point of transaction. Any further laws that specific transaction may set in motion, such as sales taxes or levies, should apply to the actual sales price.

The DOR directive is clearly in conflict with Mass. General Laws, Chapter 64H, “Tax on Retail Sales of Certain Tangible Personal Property”. In Section 1, paragraph 19, the “sales price” is defined by “the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise” with the clear stipulation in subparagraph c that “(c) there shall be excluded (i) cash discounts allowed and taken on sales.” These are the same cash discounts the state is now taxing.

To selectively apply an archaic and unenforced “full-retail tax policy” to cellphones alone is both random and dismisses the concept of tying taxes to sales prices. Inexplicably, the Globe endorsed this although, in reading the editorial, I really have no idea what they’re writing about. I guess in Massachusetts, the price is wrong.

Thursday, January 12, 2012

The Only Casino that will be built in Massachusetts

It’s nice that the Governor divided up the state into three regions for a casino. The problem is that nobody is attracted to Southeastern or Western Massachusetts if they are coming to gamble in a casino that meets the grand visions of all of us. Sorry, I don’t want to drive to Brimfield and play blackjack in a cornfield. And I don’t care if there are fifteen 5-star restaurants on the site. I don’t want to drive by abandoned warehouses and play roulette in the equivalent of Massachusetts’ Atlantic City in Fall River.

This leaves 2 options: Foxboro and Boston. I love the Pats, think the Kraft family has been an extraordinary citizen of the state, but I don’t want to drive down route 1 south, pass the 16 liquor stores and turn into a “world class” casino.

We are all forgetting one thing. A casino unto itself does not make the casino “world class” or even desirable. Casinos need access for very impatient customers and they need amenities unique to their location. Remember, we are not talking about 25 casinos along a strip in Las Vegas. Suffolk is a 10 minute van ride from Logan (not sure where the airport is in Brimfield). When your significant other wants to explore the neighborhood, I think he or she might prefer the 10 minute bus ride to Faneuil Hall than the footbridge adventure into Patriot Place. I truly have no idea where one goes if one goes outside at all in Fall River or Brimfield.

Do we want a world class casino? Then put it in a world class city. I can hear western Mass. complaining already. “We’ll depend on New England visitors!” No, not if there is a more exciting choice. Isn’t that what casinos are all about? Excitement. And nobody from Chicago’s flying in to gamble in Fall River. And no businessmen in Boston are going to drive 2 hours to hit the cornfields of Brimfield.

Further, once Suffolk is chosen, there will be no other casinos in the state. They can’t compete and they won’t compete. Look at what they’d be up against. Where would you go to play?