Nothing to gain from capital-gains hike

Commentator John Steele Gordon

TEXT OF COMMENTARY

KAI RYSSDAL: Think about this for a second as you consider the joys of the US Tax Code. Despite the up and down year that was Wall Street in 2007, mutual fund investors are going to be paying more in capital gains taxes tomorrow. How come? Investors see the market fall. They sell out of their funds to stop the bleeding, which is fine, but then they have to pay taxes on whatever gains they managed to hold onto.

The tax code hasn't gotten much attention in the presidential debate so far, but commentator and business historian John Steele Gordon says proposals to raise capital gains taxes might not be so smart.


JOHN STEELE GORDON: Both Senator Clinton and Senator Obama have called for an increase in the capital gains tax rate. It's currently at 15 percent, and they'd like to see 20 or even 25 percent. Have they really thought this through? Consider four things.

First, the capital gains tax is usually thought of as a "rich man's tax." After all, only capitalists have capital gains, right? That was mostly true in the 1930s, when capital gains were first treated differently from other kinds of income. It's not true today, when over half of American households own financial securities. The vast majority of capital gains taxpayers today are solidly middle class. In 2005, 47 percent of households paying capital gains taxes had incomes below $50,000, and 79 percent, almost four out of five, had incomes under $100,000.

Second, both senators have said an increase in capital gains taxes would increase federal revenues, but when the tax was raised in 1986, from 20 to 28 percent, tax receipts went down, not up. People just stopped realizing capital gains. When Bill Clinton signed a reduction in the tax rate into law in 1997, however, receipts soared. They soared again after 2003, when the tax was further cut to 15 percent. Capital gains tax receipts actually doubled in the next three years.

Third, stock prices are determined by the market's best guess as to future earnings. If you raise the capital gains tax you inescapably lower the possible future earnings on all stocks. So what happens? The market goes down. A capital gains tax hike is a perfect way to cause a bear market, or make one worse.

Fourth, in a globalized economy, a capital gains tax increase would discourage investment in the US from abroad, where capital gains taxes are often lower.

Raising the capital gains tax is a classic example of what George Orwell called, "an idea so stupid only an intellectual could have conceived it."

RYSSDAL: Business historian John Steele Gordon's most recent book is called "An Empire of Wealth."

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