By Dan Calabrese
We told you several weeks ago that this is under consideration, and we explained the economic benefits of the move. Indexing capital gains for inflation would simply tax the gains in a manner the better reflects their real value given the impact of inflation. It would also free up more capital to be invested in the productive sector of the economy, which would help ensure that 4.1 percent growth we liked so much in the second quarter doesn’t turn out to be a mere blip.
So how have the media decided to treat this potential growth-friendly policy move? Pretty much exactly as you’d expect them to:
The Trump administration is considering bypassing Congress to grant a $100 billion tax cut mainly to the wealthy, a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors and conservatives.
Steven Mnuchin, the Treasury secretary, said in an interview on the sidelines of the Group of 20 summit meeting in Argentina this month that his department was studying whether it could use its regulatory powers to allow Americans to account for inflation in determining capital gains tax liabilities. The Treasury Department could change the definition of “cost” for calculating capital gains, allowing taxpayers to adjust the initial value of an asset, such as a home or a share of stock, for inflation when it sells.
. . .
The move would face a near-certain court challenge. It could also reinforce a liberal critique of Republican tax policy at a time when Republicans are struggling to sell middle-class voters on the benefits of the tax cuts that President Trump signed into law late last year.
“At a time when the deficit is out of control, wages are flat and the wealthiest are doing better than ever, to give the top 1 percent another advantage is an outrage and shows the Republicans’ true colors,” said Senator Chuck Schumer of New York, the Democratic leader. “Furthermore, Mr. Mnuchin thinks he can do it on his own, but everyone knows this must be done by legislation.”
Capital gains taxes are overwhelmingly paid by high earners, and they were untouched in the $1.5 trillion tax law that Mr. Trump signed last year. Independent analyses suggest that more than 97 percent of the benefits of indexing capital gains for inflation would go to the top 10 percent of income earners in America. Nearly two-thirds of the benefits would go to the super wealthy — the top 0.1 percent of American income earners.
The media template is to launch straight into class warfare whenever changes in the tax code are contemplated. And in the course of doing so, they always fail to appreciate the broader implications for the movement of capital.
Taxing capital gains has always been an anti-growth policy because it discourages investment. How does it do that? By limiting the potential reward for the risk you take. Every time an investor puts capital into an investment, there’s a certain risk of losing some or all of that capital. That demands a sober risk/reward assessment of each investment decision. If the risk of loss is high and the potential for reward is limited, the investor is far less likely to take the risk. When you tax capital gains, you’re lowering the reward potential and swinging the decision closer to “don’t invest.”
Indexing capital gains for investment would at least hold investors harmless as inflation depletes the value of the cash amounts they earn.
But there’s also the question of what happens with the investment capital. Investors put capital into businesses looking to do any number of things. They might be looking to build a factor or a strip mall. They might be looking to acquire equipment. They might be looking to hire people. They might be looking to bring a product to market. The investment capital always supports economic activity that keeps people employed and makes it possible for them to also engage in consumer spending.
What seems to bother liberals about capital gains is that a) it’s usually rich people who realize them, because they’re the ones who have the money to invest in the first place; and b) the gains are not “earned” in the sense that the investor didn’t do back-breaking physical labor in exchange for the money. But what the investor did was take a risk, and without people who are willing to take such risks, much of the economic activity we want to see will not be happening.
The proposal to index capital gains is a pro-growth idea that will support the type of economic activity the media scream about when there isn’t enough of it. It’s good when rich people can gain from making investments, because they will then more of them, and that will give us all the productivity we all claim to want.
But the only thing the media want you to know about this is that the “super-rich” will benefit. What they don’t tell you is that, when the “super-rich” keep investing capital into markets, so does everyone else.
Dan writes Christian spiritual warfare novels and does all kinds of other weird things too. Follow all his activity by liking him on Facebook!