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Monday, October 15, 2007

WSJ: A Capital Gains Primer

Interesting editorial in today's Wall Street Journal:  A Capital Gains Primer:

Wsj_capital_gains_chart_2_2 When it comes to taxes, Barack Obama is no Jack Kennedy. The Illinois Senator recently announced that he wants to raise the capital gains tax to restore "fairness" to the tax code. That makes it a three-peat: All of the leading Democratic contenders for President have endorsed higher taxes on stock ownership. Hillary Clinton is the "moderate" in that so far she'd merely raise the tax to 20% from the current 15% -- a 33% increase. John Edwards and Mr. Obama want to nearly double it, to 28%.

This would repeal not only the Bush capital gains tax cut of 2003 but also the 1997 bipartisan tax cut signed by Bill Clinton, which cut the rate to 20% from 28%. In explaining his proposal, Mr. Obama ignores JFK's arguments about economic growth and instead plays the envy card: "For decades, we've seen successful strategies to ride antitax sentiment in this country toward tax cuts that favor wealth, not work."

But it's not only the wealthy who will take a hit from higher capital gains taxes. Recent surveys indicate that roughly 52% of American adults own stock in some form, and last year 8.5 million of these investors paid a capital gains tax. The value of those assets will decline if capital gains taxes go up because financial markets instantly capitalize higher taxes on stock profits into lower stock prices. ...

Taxing capital gains at a lower rate than ordinary income is a long-established policy to encourage risk taking and investment. ...  The differential rate also compensates for the fact that the tax applies to the value of inflated capital gains, rather than the real gains. ... Ah, but won't the Treasury benefit from a revenue windfall? Almost certainly not.

Every generation or so, it seems that the American political class has to re-learn these tax policy lessons the hard way. What's especially striking about this year's Democratic economic proposals is how little any of them mention economic growth. Their message is "fairness," inequality and income redistribution. They seem to think taxes can be raised with ease, and no one's behavior or investment choices will change. Jack Kennedy knew better.

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