Tax Capital Gains like Ordinary Income
and Jettison Keynesian Economic Philosophy

November 15, 2008. Updated April 29, 2013.

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

To: Honorable President Barack Obama
Cc: Honorable House Speaker John Boehner
Honorable Senators Harry Reid, Richard J. Durbin, John McCain and Bob Corker

Date: April 29, 2013

Sub: Tax Capital Gains like Ordinary Income and Jettison Keynesian Philosophy

Dear President Obama,

This memo bears reference to two previously circulated notes, entitled, "Fallacy of Keynesian Economic Philosophy," and "Winning Economic Philosophy of Governance. Since December 15, 2012, the "Winning Economic Philosophy" has been rechristened as Constitutional Capitalism for First-best Governance, because it denotes first-best efficient rules for governance of financial markets to preserve long-run economic equilibrium (stability). The first-best efficient rules obtain in a very general model of the economy comprising leveraged households and businesses maximizing their net-worth, markets pricing assets freely and a not-for-profit government running efficiently. The only ulterior goal of this author is to beseech the government to adopt only those rules which maintain long-run economic equilibrium (stability).

Anyone could have seen eventual floundering of the Keynesian economic philosophy, for it is not founded on any rational long-run equilibrium model of the economy. It is an a priori philosophy of governance to print and spend new money whenever the economy shrinks and the households and businesses remain wary of spending their net savings. Keynes states explicitly that everyone dies in long-run, which implies that his philosophy cannot maintain long-run economic equilibrium according to him.
This should have forewarned ultimate crashing of the Keynesian philosophy.

Compare the Keynesian philosophy (not founded in any rational model for long-run equilibrium) with Constitutional Capitalism
for First-best Governance designed to maintain long-run economic equilibrium (stability). Constitutional Capitalism is not founded on any philosophical dogma, unless rational analysis is called dogma. Neither is it driven by any implicit philosophy. The set of first-best efficient policies–obtained in equilibrium within a rational model that does not dogmatically grant any privilege or subsidy to any group via a priori assumptions–is named Constitutional Capitalism.

The only way the government can discard Constitutional Capitalism is by proving that the axioms of the general equilibrium model
which produce first-best efficient policies are irrational, unfair or unconstitutional or that the theorems are erroneous.

To portray that Constitutional Capitalism for First-best Governance is driven by politics, dogma or philosophy is ludicrous. Only second-best policy experts or their proxies who thrive immensely from the established second-best system can be motivated to make such portrayal.

The second-best policy expertise is based on a priori axioms of granting exclusive privilege to a few. Such axioms are obviously
driven by political philosophy or dogma of granting privilege to a few. They cannot be rational, fair or constitutional. The 'equilibrium' in these models is thus preordained by the a priori dogmas to beget second-best welfare for the vast majority (principals) that invent and innovate to produce globally competitive goods, services and ideas needed to prop national economy and security. The model that attains Constitutional Capitalism for First-best Governance in equilibrium has no dogma-driven a priori axiom.

New Empirical Evidence on First-best Efficient Governance

New policies adopted by the U.S. Congress, Presidents and the Federal Reserve are consistent with first-best efficient rules of
governance, as detailed in various memos and papers.

Economists (Reinhart, Rogoff and others) have recently found significant empirical evidence about a negative relationship
between public debt and economic growth. But they present no economic theory on rising public debt hampering economic growth. Lack of theory is perhaps why top Keynesian economists like Paul Krugman have not accepted the new empirical finding as evidence against perpetuation of the Keynesian philosophy.

There exists, however, a theory about subsidies stifling economic efficiency. This theory is crucial to pursue rationally the current hot debate on fiscal deficit, rising debt and potential monetization of government debt by central banks. New econometric tests can be done to establish a negative empirical relationship between public debt and real economic growth that excludes the rising value of financial assets like credit default swaps, which you have publicly criticized.

The amount of public debt may seem incidental to an economy. But economic inefficiency caused by rampant subsidies can destruct governments and cause monetization of debt. How? Rampant subsidies have so far piled as ballooning public debt due to
insufficient tax collections. If one considers the basket of goods and services used for measuring real GDP as the basic input
needed for workers to produce the GDP, the economic growth becomes a measure of efficiency. Lack of growth will then imply
economic inefficiency. Theory shows that subsidies (which have piled up as public debt) cause inefficiency (declining economic
growth). This theory appears to bear a strong support of the new empirical evidence about a negative relationship between debt and economic growth.

There is, however, a serious issue of econometric inconsistency in claiming such support. The GDP figure (especially in the developed economies) is dominated by financial assets within the current System of Money and Finance, which is proved as
economically inefficient and unstable. This is why the new empirical finding cannot consistently support the theory of no-subsidy mantra in governance needed to attain first-best efficiency, even if one tries to do so.

New Econometric Test Needed

It behooves the empiricists to conduct a new econometric test of whether the GDP minus the rise in the value of financial assets
grows inversely with the growth in public debt. Only the new econometric test can confirm any empirical relationship between
subsidies (as measured by rising public debt) and the real economic growth (measuring true efficiency) as opposed to rising
value of financial assets. I am sure the Federal Reserve can conduct a neutral empirical study.

First-best Efficient Policies

Since the ultimate national goal is to improve economic efficiency (growth), the government should focus on the following
policies, especially if the new empirical test confirms the theory of no-subsidy mantra to attain first-best efficiency in
governance:

  • Containing the rampant subsidies in the system.
  • Taxing the rise in the value of financial assets (capital gains) at par with income tax rates so that net incomes of businesses and households are invested to grow the real economy, as much as in raising the value of financial assets.

With profound regards,

Sankarshan Acharya

Founder, Citizens for Development & Pro-Prosperity.Com
http://pro-prosperity.com/About.html
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