OCPP Finds that Cutting Income Tax on Capital Gains Would Harm Nearly All Oregonians

"Oregon's most serious economic problem is not sub par growth, but the growing gap between the haves and have-nots" - OCPP analyst Michael Leachman.

(SILVERTON, Ore.) - With the state having begun a top-to-bottom review of its tax system, a report released today makes the case that cutting the existing income tax on capital gains -- an idea often bandied about -- would harm all but the wealthiest Oregonians.

The report, prepared by the Oregon Center for Public Policy, identified seven reasons why giving special treatment to income from capital gains is a "terrible idea." It called the income tax on capital gains "the best player on the income tax team," generating strong revenue for the state during good economic times and providing support during downturns.

"For us to get rid of the tax on capital gains income would be as calamitous as the Boston Red Sox's trade of Babe Ruth to the Yankees," said OCPP analyst Michael Leachman. "It would be an historic mistake and set Oregon on a path of mediocrity that we would be regretting for many years to come."

Capital gains are profits on investments such as stocks, bonds and real estate. Currently, Oregon taxes income from capital gains at the same rate as all other forms of income.

"Some people take it as gospel truth that giving special tax treatment to income from capital gains will spur economic growth and employment, but there's little evidence to support the claim," said Leachman.

According to OCPP, analysis by the non-partisan Congressional Budget Office has found that cutting the tax rate for capital gains produces minimal economic growth -- a conclusion buttressed by Oregon's own experience. In the late 1990s, the state experimented with a program allowing investors in start-up companies to defer income taxes on capital gains reinvested in Oregon businesses. A state review of the program, however, found that it failed to produce additional investments or jobs.

The Silverton-based think tank's report comes as a task force created by the state legislature and appointed by the governor undertakes a comprehensive review of Oregon's tax system. OCPP executive director Chuck Sheketoff is a member of the Revenue Restructuring Task Force.

OCPP's report dismissed claims that Oregon's system of treating capital gains income the same as income from work acts as a drag on the state's economy, pointing to the fact that this decade Oregon's economy has grown by nearly 45 percent, ahead of the 43 percent growth nationally. The OCPP report also notes that since the end of the 2001 recession, job growth in Oregon has been significantly stronger than in the rest of the country.

"Oregon's most serious economic problem is not sub par growth, but the growing gap between the haves and have-nots," said Leachman. "A cut in the income tax on capital gains would exacerbate that disparity."

If Oregon went the special treatment route and halved the tax rate for capital gains income, 70 percent of the tax savings would go to the wealthiest 1 percent of Oregonians, whose annual incomes average over $1 million, according to OCPP. By contrast, 60 percent of Oregonians would effectively receive nothing.

Also, providing such special treatment would directly harm most Oregonians, because it would slash state revenue, the report added. This would force cuts in essential services or increases in other types of taxes. For example, OCPP estimated that halving the tax rate on income from capital gains would lower revenue by about $546 million per biennium -- more than what the state spends on all of Oregon's 17 community colleges.

Among the 42 states,counting the District of Columbia as a state, that levy a broad-based income tax, only 10 give significant preferential treatment to income from capital gains, according to OCPP. The governor of one of those states, Vermont Governor Jim Douglas, recently called for ending the "grossly unfair" special treatment. Douglas, a Republican, said the preferential treatment was an "unfair penalty for doing an honest day's work."

Salem-News.com Top Stories

2025: Hope for the Best, Prepare for the Worst

Two Wars with No Way Out

No One Owns the Future

The Ugly Origins of Trump's America First Policy

A One-State Solution Could Transform the World

Comments Leave a comment on this story.

All comments and messages are approved by people and self promotional links or unacceptable comments are denied.

Jefferson January 23, 2008 6:16 pm (Pacific time)

I suggest one let common sense be your guide, or allow those who have never been involved in running a business think for you. I believe I know what clear-thinking individuals will decide. Hopefully a recession, if it happens will be short-lived and our pretty good economy will continue to make us a great country. I hate to think what would happen if certain types got in charged and did what they desire, i.e. , a complete income re-distribution. So, can anyone name some place past or present where people have thrived in this socialistic type of environment? Of course not, it is a fool's errand...but fools abound, seemingly everywhere, at times...

Henry Ruark January 23, 2008 4:36 pm (Pacific time)

To all: That painting contractor has a 19th Century business plan, seeking out those with large-money for his services. What's happened now is that many, many middle class cannot afford such prime services, so they DIY anything they can which means paint is now sold in large quantities from big-box stores for each to choose, and apply personally, not a bad choice for many reasons. (Fights obesity, for one...!!) Given global dive into the arriving recession, monied clients sure to become more and more extinct, with most middle class unable to buy even food and shelter, much less paint !! Gap between two segments of society growing wider every day..."See with own eyes", again, on Internet. Re Nobel winners, how come this one acceptable but Gore target of personal attack ? OR perhaps preference should go to Stiglitz, with warning opinion in precisely the opposite direction ? (PDF on request, with ID, to editor) OR several others, who happen to agree with Stiglitz, and the consensus of most economists.(PDFs, ditto) Shall we conduct a poll to see ratio between "Ups" and "Downs" among economists ? Without such direct action by us, we must then rely, as usual, on media reports --as in PDFs offered, with ID. Even trained specializing economists sometimes disagree nearly as much as Commenteers here, but on this one they are heavily one-sided, as most media reports clearly indicate, and NOT with your man, either. "See with own eyes" widely on Internet. So still think Mencken right on...what else left to point out ?? "Sample" grows heftier and more obvious with every one of Comments, remarkably so.

Jefferson January 23, 2008 12:59 pm (Pacific time)

I will bow to a Nobel Prize winner's opinion on this matter (see below), and I assume the OCPP will challenge this individual with one of their own Nobel winners? The crux of this issue is not hard to understand. The formula is simple — lower rates on dividends and capital gains make investment more attractive. The capital provided by investment is the fuel that firms (also individuals) use to grow and to hire workers. The lower the tax rates on dividends and capital gains, the more the economy grows and the more jobs are created. The engine of a free-market economy is "not the government" but entrepreneurs and risk-takers who need investment capital in order to grow. That’s why this issue is so important. As Nobel Prize-winning economist Edward C. Prescott put it in a recent Wall Street Journal op-ed, higher taxes on capital gains and dividends “are particularly cumbersome because they hit a market economy right in its collective heart.” Gee! Makes a lot of sense to me, and that's based on experience not theory. I guess one has to look for some way to validify which side of this arguemnt makes for more "reasonableness" and see if there may be a hidden agenda by those whose ideology includes a big government scenario that requires a constantly growing tax base? I like what the below painting contractor said in a previous post: "I have never been hired by a poor person!". If my capital gain taxes went up, then I would have less money, subsequently I would no longer be able to afford to pay for some services I now use. Those people would now not have me as a paying client, and this may also impact many more of their customers, resulting in a very strong possibility of them laying off people, even closing down their business.

Henry Ruark January 23, 2008 10:48 am (Pacific time)

To all: Do believe Mencken had it right...open generalizations never tell whole story, and complex situation here must surely be known to any thinking person able to read, listen, and/or view worldwide TV.

Jefferson January 22, 2008 3:59 pm (Pacific time)

Over the years I have noticed that when taxes are lower, more revenue streams into the government. Can anyone name some place where taxes continue to go up and things are better for middle class Americans? Our country has gone through quite a number of stressful events in the last 8 years or so, and when many people wanted taxes raised, they instead were reduced (fortunately) and tax revenue went up. I found it interesting that in New York when Gulianni(sp?) first took over as mayor, the city was in financial straights with a significant unemployment problem. The mayor began cutting different city-related taxes and fees...and what do you know, revenue went up, more jobs were created and the unemployment rate went down. This is certainly a simplification of what happened, but we have financial models all over the planet that provides you clear and real time examples of what high taxes cause to different countries and in many situations it's not pretty. As I see it, at least for now, the market will correct itself, and the government needs to minimize it's mingling with these market forces. Keep your short term money out of the market (you should never have it in the market to begin with, only long term funds), don't ever expect 100% financing(if someone is offering it, then be very skeptical), and simply be prudent. People are still shopping in the malls, stock is still being traded, but if you overtax people and businesses, then the money will dry up, and then we will have a more serious problem. As a conservative, I am always in favor of lowering tax rates; from the evidence I've seen, it brings in more money to our government to pay for the services we need...we need to see what services we do not need (just like we do when we plan our personal budgets) and eliminate un-needed expenses. Clear thinking people make budget adjustments when they need to, governments usually do not do that, so the real financial controls should be put on government spending, there lies the real financial problem (always in the making). If left alone, these government entities will always reach into your wallet, and they will always provide some smooth calculus on why you need to pay more, again, be skeptical, for many of these entities consider you nothing more than a rube...not unlike the carnival midway barkers

Henry Ruark January 22, 2008 12:46 pm (Pacific time)

To all: Mencken ran one of world's then-leading daily newspapers in Baltimore. Somehow discussion in this thread seems to recall this to my memory: "Demagogue: one who preaches doctrines he knows to be untrue to men he knows to be idiots" ---H.L. Mencken

Henry Ruark January 22, 2008 12:35 pm (Pacific time)

To all: Despite same froufrou heard in early days of supply-side, dollars still never come colored differently, or of different value, or smelling different odors, no matter what source of income they represent. For any form of government tax collection, that is equitable and as it should be. There is no economic reason or principle for treating income from capital gains in any way differently than the dollars from real work, physical or mental or financial-effort. Wide state and national experience long ago exploded the myth of differential impact, initiated as part of noisy propaganda for supply-side imposition in the Reagan era. "Trickle-down" never did, and by manipulation the large stream has now been turned neatly into flow ending with precisely where OCPP study shows. OCPP's report is extremely clear on what impacts such special treatment will have on all Oregonians, except that same 1% always seeking any possible further way to "get more for ME !! ME !!" We badly need to return to Eisenhower-era days when rates were considerably higher, at instigation of GOP hero-then.

Jefferson January 22, 2008 10:42 am (Pacific time)

There will always be different viewpoints when it comes to "taxes" as well as different types of "calculus" to support those viewpoints. Below is another viewpoint and what is on the legislative horizon. I personally share the view of the below painting contractor, i.e. , experience over theory!: The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy. -- President John F. Kennedy, 1963 You're looking at a poor man who thinks the capital gains tax [cut] is the best thing that could happen to this country, because that's when the work will come back. People say capital gains are for the rich, but I've never been hired by a poor man. -- New Jersey painting contractor Here is a partial summary of the RSC's measure (as related to tax rates), which they're calling the "Economic Growth Act." End the Capital Gains Tax on Inflation. The bill would index for inflation the cost basis used when calculating the capital gains tax on assets acquired before the end of 2008. Under current law, the capital gains tax is based on the difference in the original purchase price of the asset and the sale price of the asset. However, some of this difference, can be attributed to inflation. This provision, by effectively reducing the amount of a gain that is taxable, would encourage the movement of capital in 2008 and spur voluminous economic investment. Sharp Reduction in the Capital Gains Rate for Corporations. The bill would allow corporations to benefit from the 15% capital gains rate. Under current law, individuals pay a top capital gains rate of 15%, but corporations are subject to a 35% top rate. This provision, by encouraging corporations to sell unwanted assets, would unleash funds and materials with which to create jobs and grow the economy. This is a really good idea that should be tried, even provide a sunset to it, but give it at least some time to see what the long term impact would be.

Henry Ruark January 22, 2008 6:37 am (Pacific time)

To all: The best and finest of the vaunted economic profession support precisely the well- documented position defined in this OCPP report. That myth re tax cuts on capital gains is now extremely well-known to have been --and remain !-- a main segment of the propagandized "noise" spread by the GOP "noise machine" wound into ongoing and wildly-misleading operation in the early Reagan years. The second segment was the similarly-distorted one about "government is the problem", when even then the only possible way forward for many millions in the U.S. was wise governmental policy, prevented in large part by this very "noise distortion" technique. Both are well-documented in books written by those who helped do "the dirty work." One of the consequences, highly evident today across the world, is the huge impact on all economies when the costs of this "less will produce more" myth, springing from "supply-side" theory, comes home to roost, as it inevitably will, and very obviously now IS doing precisely that.

[Return to Top]