Friday, January 18, 2013

Capital Gains Taxes -- Impediments to Growth

Part of the recent debt deal has involved an increase on capital gains rates, and the arguments raised by conservatives against this plan are decidedly lackluster. They should go back and read George Gilder's Wealth & Poverty (1981).

Gilder argues the biggest division in society is between entrenched industries and the competitors who will eventually replace them with newer and more efficient technologies. Regarding capital gains, he says
Although large companies naturally will benefit most in absolute terms, cuts in the tax on capital gains are a redemptive boon to companies that expect to grow fast, that is, new and innovating companies. Capital gains are the chief source of new wealth in a capitalist economy... This tax constitutes a big business protection act - a defense of large companies against small, old wealth against new, the past against the future. But so-called progressive politicians bitterly resist its removal from stocks... Yet most real wealth originates in individual minds in unpredictable and uncontrollable ways. 
I think this is much more convincing than the double-dipping argument we hear so often instead, which has largely become a red herring. Only 54% of Americans own stocks (a historic low) and most of them are in retirement accounts, where double-dipping is largely avoided anyways.

The real damage done by capital gains taxes is deterring risk taking in young companies, which represent most of the wealth-creation in a capitalist economy. Sometimes it pays to go back to the classics. Apparently Reagan gave copies of Wealth & Poverty to Senators and Representatives regularly; maybe the G.O.P. leadership should revive that practice. It might liven up their press conferences a bit.

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