The Corner

Tantalizing Tax Talk in California

California’s counterproductive income tax on capital gains has become a major issue in the GOP contest for the gubernatorial nomination, reports the Sacramento Bee. Fortunately, the debate between Steve Poizner and Meg Whitman is simply about how much to slice the tax rate on capital gains – either 50 percent or 100 percent, respectively.

When the two candidates’ broader tax-reform agendas are explained, however, things get a little murkier:

Both candidates have included a capital gains tax cut as part of larger tax packages. Poizner has proposed reducing tax rates on ordinary income, corporations and sales by one-tenth. Whitman has proposed increasing tax credits for research and development, tax exemptions for manufacturing equipment and incentives for environmental technology jobs.

Poizner believes that broad tax cuts would best stimulate the economy, [Policy Director Lanhee] Chen said. Whitman thinks the state cannot initially afford cuts to taxes on sales, ordinary income and corporations but hopes to pursue them when the economy recovers, said spokeswoman Sarah Pompei.

In general, I’d rather see rate reductions than tax credits in tax-cut proposals aimed at economic recovery. There is a good long-term case for using credits to reduce the punitive tax treatment of family expenditures on health care, education, and other human-capital formation, but neither candidate seems to be talking much about that. As for tax credits for R&D and the like, yuck. The state shouldn’t be mucking around in the capital-allocation decisions of businesses. Ditto for Washington.

Still, whenever you see a debate about how much to reduce the double-taxation of investment income, you see progress.

John Hood is a syndicated columnist and the president of the John William Pope Foundation, a North Carolina–based grantmaker.

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