There are discussions underway in Washington D.C. between Democrats and Republicans to come to a compromise in order to avoid the country going over the so called “fiscal cliff”. This is the year end arrival of tax increases and spending cuts that many economists think will send the country into recession if it is allowed to occur. During these discussions there is a fundamental change in one of the party’s views on an element of encouraging growth in the economy. This is the concept that low capital gains taxes help the economy, and actually increase revenue to the Federal Government. Today’s Democratic Party no longer believes this is true.
Capital gains tax rates have not gone up in 26 years. One of the few things that the parties had agreed upon up until recently was that when you tax capital at a higher rate, you reduce investment, you reduce investment…you get less growth, you get less growth…you receive lower revenues and unemployment goes up. Conversely lower rates on capital leads to greater investment, more growth, more jobs, and even higher revenue to the government.
In the media’s near hysterical reporting on the risks of the “fiscal cliff” there has been very little discussion of what are the ways to promote growth. All that is reported is that a deal is needed or we will fall off the cliff. This is similar to the way that Europe’s issues were reported on last year. ‘Any deal will do’ seemed to be the mantra. Now there is stagnant growth across Europe, and their debt problems are worse. Without an eye toward growth, or what hurts it, we will face the same fate. The Democratic Party is much more interested in fairness, and the media is willing to go along.
We can get into the issues of how low capital gains rates are “fair” in that the money used to invest is already taxed, or that any gains are also taxed at the corporate level. That, however, is not the most important issue. The most important issue is supposed to be economic recovery, growth in the economy, and the creation of jobs. Low capital gains rates help all of these things, and higher capital gains rates make these things harder.
John Kennedy used to say regularly that, “a rising tide lifts all boats.” Jimmy Carter and Bill Clinton signed bills to lower Capital Gains rates. After years of agreement between the parties in terms of understanding that economic growth is generated by private investment, one of the parties has decided to abandon this point of view. The current Democratic Party, under President Obama, no longer seems to care that raising these particular taxes may hurt the economy or the prospects of growth. They seem to be much more interested in living up to their rhetoric of fairness, income inequality, jealousy, and even revenge. When you tax something more you get less of it. Now is not the time for less Capital.