TAXING MATTERS:

The Capital Gains Escapades of Rep. Paul Ryan

Aside from the sub-three-hour marathon he never ran, the most fanciful notion to come from GOP vice presidential candidate Paul Ryan is his proposal to eliminate capital gains taxes. The idea violates a central principle of tax equity, it mocks his tax reform and deficit-cutting pretensions, and it tends to confirm what the economist Paul Krugman has been saying for the longest time—Ryan is an over-hyped pretty boy, heavy on ideology but light on fiscal chops.

The tax principle that Ryan would flout is called horizontal equity. Simply put, it holds that people who make similar incomes should pay similar taxes. Obviously, with no tax on capital gains, there’s no hope of horizontal equity.

Not that there’s any such equity now. Capital gains (and dividends) are hugely tax-advantaged, with the tax on long-term gains currently at an 80-year low of 15%. If the Bush tax cuts expire on schedule, the capital gains levy is set to rise to 20% in 2013—still less than the tax the middle class pays on wages.

Things might have been otherwise if Ryan had voted differently as a member of President Obama’s bi-partisan fiscal commission, a.k.a. Bowles-Simpson.

The commission, you’ll recall, was charged by the president with developing a plan to attack the federal deficit and put the nation on fiscal terra firma. Led by co-chairs Erskine Bowles and Alan Simpson, the commission delivered as charged. A key ingredient in their plan was horizontal equity: equal taxes on all income, including capital gains and dividends.

Ryan chairs the House Budget Committee, and was the acknowledged policy-wonk leader of the Republicans on the commission. He’s fond of talking the talk on deficit reduction. Put to the test, he declined to walk the walk. He voted against the plan; it was his vote, essentially, that turned the promise of Bowles-Simpson into one more instance of gridlock, one more disillusion.

Coincidentally, another deficit-reduction plan came in close on the heels of Bowles-Simpson. This one issued from the Bipartisan Policy Center’s Debt Reduction Task Force, and it was co-chaired by former Federal Reserve official Alice Rivlin and ex-senator Pete Domenici. Its recommendations differed in important respects from Bowles-Simpson, but the plans had this in common: each called for horizontal equity, for equal taxes on all income.

In his acceptance speech at the GOP convention, Ryan slipped in a marathon-like mention of the Bowles-Simpson commission: “He [Obama] created a bipartisan debt commission. They came back with an urgent report. He thanked them, sent them on their way, and then did exactly nothing.” Of course it was Ryan himself who effectively doomed Bowles-Simpson, making sure the report went to the White House without the necessary support to force a Congressional vote.

While the fiscal pretender Ryan calls for an end to capital gains taxes, others continue to call for horizontal equity. A recent New York Times editorial scolded private equity firms for converting management fees into capital gains in order to take advantage of the 15% rate. “The best way to end this problem,” the Times concluded, “is to get rid of the special rate for capital gains. As long as income from investments is taxed at a lower rate than income from work, there will be no stopping the search for ways, legal or otherwise, to pay the lower rate.”

There’s another believer in horizontal equity too, but he’s no longer with us. President Ronald Reagan’s signature Tax Reform Act of 1986 called for equal taxes on all income. In a signing ceremony on the White House lawn, Reagan called the bill “a sweeping victory for fairness....and the best job-creation program ever to come out of the Congress.”

There’s no better time for an encore than 2012.