The capital gains tax is destructive. By lowering the rewards of successful risk-taking—essential to innovation and a higher standard of living—the cap gains tax needlessly hobbles progress. It also hurts people’s retirement incomes. Equity prices would be higher with a lower rate or, even better, without it altogether.
This is why President Trump and his tax-writing team should include a sizable reduction in the capital gains levy in the bill they’re cobbling together with various members of Congress. Such a cut would not only help the economy but also instantly raise more revenue for Uncle Sam. This should appeal to so-called deficit hawks.
Of course, critical to getting out of our fiscal mess is sizable economic growth, and a lower cap gains tax would be very helpful.
Today, that tax is too high. On the federal level, it’s 20% plus an additional 3.8% Medicare surtax, for a total of almost 24%. Then there are additional state taxes. Knocking down the rate on the federal level would set a positive example for the states to do the same.
Republican tax writers should emblazon on their minds and ceaselessly remind their colleagues that cutting the capital gains tax immediately means more revenue—not a year or two down the road, but right away. Instantly. It’s bipartisan: When this exaction was reduced in 1997 under Democrat Bill Clinton, tax receipts went up nicely in 1998; when this tax was cut under Republican George W. Bush in 2003, it meant more revenue in 2004.
People more readily realize gains on their securities when there’s a lower tax penalty for doing so. Whacking the current 23.8% to 15% would render such a delightful impact. Investors are sitting on mammoth stock market gains. They would love the chance to pocket some of those profits and redeploy the rest to other opportunities. Remember, you want this kind of mobility in capital for new investments instead of its being frozen in existing ones.
Democrats will naturally label any easing of this levy as a giveaway to the rich. So what? Just about anything the GOP proposes on taxes is criticized as such. The key for Republicans to keep in mind is whether a cut grows the economy and helps people. This one does, big time.
The case for a low cap gains tax—or eliminating it—is overwhelming. It harms capital formation by reducing after-tax returns. Along the same lines, it’s double taxation, since profits have already been taxed at the corporate level and are taxed again when distributed. Capital is the essential fuel for progress.
The effective tax rate is higher than the nominal one because gains aren’t indexed for inflation. All too often investors with stocks that have been held for a long time end up paying a tax on fake gains.
The Trump tax team should embrace this essential reform.
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