The controversy over Mitt Romney’s tax returns underlines the need for broad reform of the U.S. tax system. Much commentary has focused on the low average tax rate that this wealthy candidate for president enjoys, thanks in large part to low rates on capital gains.
The political issue raised by Romney’s taxes is simple: should the rich pay a larger share of the cost of government, or, are they being justly rewarded for their role as job creators? The economic issues are more complex: Does it make sense to treat capital gains differently from other forms of income? How do capital gains taxes interact with the rest of the tax system?
The blogosphere is awash with commentary on the political aspects of the question. (See here for samples from the left and the right.) This post will tackle the economic aspects, under the headings of three economic arguments often advanced in favor of lenient tax treatment of capital gains. >>>Read more.