Depression Economics - Lowering Capital Gain Tax Rates

The tax on capital gain is 15 percent for long-term gains on investments held longer than 1 year and 35 percent on short-term gains realized in less than 1 year.  The capital gains tax is designed to provide an incentive for investors to hold their investments for long-term periods. 

This is thought to benefit the economy by keeping capital in the hands of businesses that use the money to benefit society.  Short term capital gains takes away momentum in the market and moves needed funding away from businesses and into the hands of investors.

The Impact of Capital Gains Taxation

There is always talk that during tough economic cycles, such as depressions and recessions, the capital gains tax does more harm than good for society.  This based on a free-market theory that the economy works best when investors are free from government intrusion and allowed to let the market dictate their actions.  This stance advocates low or no taxes on earnings that are not income, such as capital gains, and the lessening of government regulations design to provide a stop against abusive and dangerous behavior in the market.

A Case for Lowering Capital Gains Taxes

Lowering the capital gains tax rate or eliminating outright may provide an incentive for increase investments and the moving of offshore assets back to the United States for the purpose of increased capitalization of the financial markets.  This is the position argued by free-marketers and other pure capitalists who suggest that it is government intervention and control through regulation and taxation that causes the markets to fail.

A Case for Increased Capital Gains Taxes

The flip side to this argument is the position that without government control and intervention, investors will look out solely for their interests and not the interests of the entire society.  Such reckless behavior will manifest itself into risky over speculation and eventual downturns that lead to systemic risk, or failure of the entire financial system.  This is failure means loss of job, business and faith in our economic system.

The truth to these extreme points of view is probably somewhere in the middle.  It can be argued that the current capital gains tax system is more punitive on short-term investors than it is for those who invest for long-term growth.  It may also seem a fairer system or way of doing business by bringing the 2 rates closer in line with each other and create alternative incentives that encourage saving and investing for growth.

Effect of Lowering Short Term Capital Gains Tax

The amount of tax revenue that is loss from lowering short-term capital gains taxes can be offset by an increase in tax revenue that can be generated by increased investments in the growth and development of jobs and businesses.  Tax credits can be used to encourage this growth and be offset by the economic expansion that should result in these steps. 

This moderate or middle-of-the road approach may be more sensible than the extreme positions that are often touted by both sides.  The capital gains tax is a good system for providing some balance between the needs of investors and the needs of society but may need to be looked at in order to create even more balance and produce the desired incentives to spur growth and development.

 

 

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