Every economic theory – even socialism and Marxism – agrees that long-run growth and higher living standards are closely tied to saving and investment (a.k.a., capital formation). Yet because of double taxation, the current tax code penalizes those who are willing to forego current consumption to finance future prosperity. In an ideal system such as a flat tax or national sales tax, by contrast, there is no tax bias against income that is saved and invested.
One of the most self-destructive forms of double taxation is the capital gains tax. The Institute for Research on the Economics of Taxation has a superb three-part series on this issue, including studies on the economic impact of capital gains taxation, the impact of capital gains taxation on realizations (asset sales), and the grossly flawed revenue-estimating process used by the left to hinder good capital gains tax policy. For those seeking a faster introduction to the issue, this new Center for Freedom and Prosperity video explains why the capital gains tax should be abolished.
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Unfortunately, Obama’s policies are steering America in the wrong direction. He wants to boost the official capital gains tax rate from 15 percent to 20 percent – and that is after imposing a back-door 3.8 percentage point increase in the tax rate as part of his government-run healthcare scheme. This is in addition to his other class-warfare proposals to impose higher tax rates on investors and entrepreneurs. If he succeeds, the American economy will suffer. Here are the six reasons outlined in the video why the capital gains tax is misguided:
1. Less investment – This is simple economics. If you make future consumption more expensive relative to current consumption with the tax code, people will respond by saving and investing less.
2. Less risk taking – Big breakthroughs that make our lives better often are the result of entrepreneurs and investors who take a big chance in hopes or a big payoff. The capital gains tax reduces the payoff, so it obviously reduces the incentive.
3. Less competitiveness – Many other nations don’t tax capital gains – including some European welfare states. They understand that investment is very mobile and they want to attract job-creating capital.
4. Less privacy – A capital gains tax is necessarily intrusive since busybody politicians need to know when you acquired something, how much you paid for it, when you sold it, and how much you sold it for. It should be none of their damn business.
5. Less employment – Jobs don’t grow on trees. If someone’s not willing to provide capital, workers are the ones who suffer most. And it’s not just an issue of job loss. The biggest impact is actually lower wages thanks to a loss of productivity-enhancing saving and investment.
6. Less fairness – The tax code should not success of any kind, but it is especially bizarre to impose extra taxes on people who save and invest. The law should treat people equally, regardless of how they earn their income, how they spend their income, when they spend their income, or the level of their income.
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