Sunday, September 2, 2012

Eliminate The Capital Gains Tax!



As part of the Energion political roundtable mentioned in the prior post, several bloggers from across the political spectrum are being asked to respond in a fairly limited fashion to a series of questions.  The first question being posed deals with capital gains taxation. Should they be raised, lowered or eliminated? I will be arguing in this post for the elimination of capital gains taxes entirely as counterproductive and damaging double-taxation.

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Capital gains taxes are a generally misunderstood beast, largely because most Americans are not impacted by them. Very few of us invest in general outside of the tax deferred retirement plan offered by our employer (401k/403b) and if we do invest outside of our employer sponsored retirement plan it is rarely a large enough investment to attract significant taxation. Thus capital gains make for a convenient political football, one that is especially popular with the class warfare crowd and allows for railing against the "rich" using a topic most people don't understand.

First, what are these "capital gains" that are taxed? At the most basic level a capital gain occurs when you buy something at a given price and then sell it later at a higher price, thereby incurring a gain (buy low, sell high). This often occurs through investments in private companies via stock ownership where an investor, individual or institutional, buys shares in a company in the hope that the stock will appreciate in value. Issuing stock for sale to the public is one of the primary means for a corporation to raise funds for investment, investment that creates jobs. Stock issuance is how a company like Apple goes from an concept by Steve Jobs and Steve Wozniak into a company with 60,000 employees worth over half a trillion dollars. When an investor buys stock or another investment vehicle for one price and subsequently sells it for a higher price the gains on that investment are taxed.

So what should we do with capital gains taxes? They are a hot issue right now with the foolish statements by Warren Buffet that because he allegedly pays a lower tax rate than his secretary we should raise tax rates and the scrutiny given to Mitt Romney's tax returns with an income largely derived from capital gains. In spite of all of the rhetoric it is my contention that capital gains taxation should be eliminated entirely.

There are two primary reasons for my stance.

First and foremost, capital gains are at some level repeat taxation. When someone earns money through regular income (i.e. at their job) they are taxed on those earnings. The money they have left over after taxes and spending is then invested. When earnings are realized on those investments the same money is taxed again. While not a part of this question it remains the case that for the wealthiest individuals these funds are potentially taxed a third time via the "inheritance tax". The confiscatory tax rates we have on income are bad enough without turning around and taxing those same funds a second time when they are invested.

Second, capital gains discourage investment that is critical to job creation. We hear over and over in this campaign season "jobs, jobs, jobs!" as if it is the purpose of the government to "create jobs". If we really want more jobs rather than merely taking money from one American to give to another, the only the proper way to do that is for the government to be less involved rather than more, removing barriers to investment. We should encourage people to invest rather than punishing them and likewise we should allow risks to have consequences. That is how a free market is supposed to work.

The capital gains tax question is part of a broader discussion that is long overdue regarding the proper role of the government. As it stands right now, virtually every economic activity falls under the oversight of the government, from multi-billion dollars international conglomerates to the selling of raw milk from one individual to another. Likewise every monetary transaction is subject to regulation and taxation by the government, an enormous wet blanket on economic activity.

At the most fundamental level, tax policy speaks to how we think of money. When we think of earnings do we see them as belonging 100% to the individual who earned them and a percentage is taken by the state or does it belong to the state 100% and a certain percentage is given back to the individual earner? We see the second mindset on display on a regular basis with talk of lower taxes being an expense or "spending" as if the government has first dibs on all earnings. My view is that the earner is the only one who has claim to his or her earnings and that taxes should be limited to funding only the essential and Constitutional functions of the Federal government. That is a broader topic beyond the scope of this post but it is a critical distinction. We cannot discuss capital gains taxation in a vacuum but must see it as part of the greater discussion of rights and responsibilities in a free society. We are taxed when we earn income (income tax), we are taxed when we spend that income (sales tax), we are taxed when we save (interest and dividend taxes), we are taxed when we own a home (property taxes), we are taxed when we invest (capital gains taxes) and many of us are taxed when we die (estate taxes). Doesn't it strike you as odd that every time we engage in any sort of economic activity that the government takes another bite?  

As a libertarian I find the capital gain tax to be onerous and burdensome, an unwanted and unnecessary additional tax on investment that serves to swell the government tax coffer while hampering investment. In fact capital gains taxation does precisely the opposite of what is intended by discouraging investment in ways that are perhaps the most lucrative and pushing investment toward vehicles that minimize taxation, a tilting of the investment landscape in an unnatural direction. Many mutual fund companies offer specific funds that are designed to minimize tax exposure in a non-retirement account (for example the Fidelity Tax Managed Stock Fund). The managers of these funds make decision not based on the investment potential of a vehicle alone but with an eye toward minimizing taxation. Often financial and tax advisers encourage their clients to sell at a loss to offset capital gains. This sort of behavior is counter-intuitive and harmful.

The government has no business taking a piece of the action every time an American engages in economic activity and by and large those taxes are counterproductive, taking money that could be invested and spending those funds as transfer payments. In essence capital gains taxes punish those who are successful and expose a preference for transferring money around among citizens (with the aid of well paid unionized government bureaucrats) instead of letting the private sector invest and grow. The insatiable appetite of the government will never be sated with taxes, no matter how high. We should instead encourage economic growth through investment by eliminating the double taxation and growth suppression of capital gains taxes.
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For more information, check out this video from that probably does a better job explaining what I just wrote...

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