Capital Gains Tax Cuts: Who Wins, Who Loses?

Taxes are all over the news, these days. No wonder, since they affect all of our lives. Payroll taxes, income taxes, death taxes, “sin” taxes, etc. There’s a slew of them. But, the one I’d like to address is the (in)famous capital gains tax, which is currently about 15% (down from 20%, thanks to President G.W. Bush). Liberals generally want to raise it (as does Obama); conservatives want to keep it low or abolish it altogether. To the liberal mind, capital gains are where the “rich” get, maintain, or increase their wealth, so any cuts to the capital gains tax rate are considered gifts to the rich. And, of course, the “rich” are often castigated by the Left for having “too much” money and not paying their “fair share” of taxes, anyway.

Scrooge McDuck carrying gold and oil

Uncle Scrooge McDuck

The “capital” in question refers to various sorts of investment — from stocks & bonds to art, real estate, even a business. Sometimes this capital is sold. The “gain” is the difference between original purchase price and sale price, assuming the latter is greater than the former (i.e., there’s a profit). Unfortunately, the tax on such gains does not take into account the effect of inflation on the sale price. This means that the asset’s value appears to have appreciated more than it really did, and the individual ends up paying an “inflation penalty.”

So, that’s what it is. Now, I’d like to take exception with the claim that cuts to the capital gains tax rate are a negative for the economy and only benefit the wealthy. Or, rather, I’d like to let Steve Forbes make the point:

“Experts agree that capital gains tax cuts produce an especially large bang for the buck. They’re a great way to boost the economy. That’s because high capital gains rates cause what is called a ‘locked-in’ effect. Investors hold off on selling assets to avoid the tax. But if capital gains taxes are cut, those same people sell — and invest. ‘Locked-in’ wealth is released. Growth soars, along with a surge in tax receipts.

The Bush administration’s 2003 capital gains tax cut was a key reason that the economy finally recovered from the 2000-2001 recession. Donald Luskin, chief investment officer of Trend Macrolytics, LLC, analyzed the Congressional Budget Office’s annual ‘Budget and Economic Outlook’ report in 2006. He concluded that the cuts actually ended up generating more money for government, not less, as had been feared. ‘Instead of costing the government $27 billion in revenues, the tax cuts actually earned the government $26 billion extra.'” (Italics added by me.)

So, Washington ended up with $53 billion more to play with than anticipated. Nice! (Although, I’m not sure I want to know where that money went. Too depressing.) But, liberals still demonize tax cuts of all kinds, especially if they can manipulate the data to make a conservative like Bush look bad because of it. After all, it was just a tax cut for the rich, right? The middle-class got screwed, as usual, right? Wrong on both counts. The numbers say otherwise:

“Nor did the rich get a free ride from those cuts. According to Stephen Moore’s study for the National Center for Policy Analysis [NCPA],

‘[T]he rich did not get a huge tax cut from the capital gains [tax] cut; in fact, the percentage of income taxes paid by the rich increased from 34 percent to 39 percent from 2003 to 2005 (the most recent year for which data are available). The capital gains tax cut did not only benefit wealthy Americans; more than half of all tax filers with capital gains had incomes of less than $50,000 in 2005 and more than two-thirds had incomes of less than $100,000.'”

This may seem a bit surprising, since we usually think of only the “rich” having the kind of assets that can be sold for appreciable gains. But, a lot more people are investing these days than were, say, 30 years ago. At least half of American households own stock, the most common such investment. That’s the middle-class, folks, where most of us reside.

“Many have wondered why capital gains are taxed at all. Capital and income are two very different things. Income is the fruit that comes from ongoing enterprise. Capital fuels the enterprises and investments that drive growth and generate income for many. Reducing the amount of capital through taxation reduces this societal benefit. Free-market skeptics fail to understand this Real World economic truth — the ‘gain’ produced for government by taxing capital is far outweighed by the cost to the economy and to people.”

As is usually the case, real world examples demonstrate that conservative economic principles/policies work for the betterment of the nation (and many of our friends), while “progressive” economic principles/policies do not work — except to make things worse. (Witness the last few years in the U.S. and the past few decades of socialist & semi-socialist policy in most of Europe now coming to a head.)

I would love to see the capital gains tax rate eliminated, or at least reduced to the single digits. (Not that I personally have any capital to “gain” from.) By releasing some of that “locked-in” wealth and encouraging investment & entrepreneurship, it would be a welcome step in getting this economy back on track.

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1 Response to "Capital Gains Tax Cuts: Who Wins, Who Loses?"

  • Vipul Hove says:
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