Helping American Business Prosper: Capital Gains Tax Reform
The Capital Gains Tax directly effects and influences investment decisions and the ease or difficulty experienced by new ventures in obtaining capital. The capital gains tax increases the risk of obtaining financial capital itself, thus increasing the difficulty as well. The capital gains tax impedes investment and risk taking, both of which should be encouraged in our economy, not reprehended. This is simple tax theory 101: If you tax something, you get less of it. If you tax something less, you get more of it. With this simple and understandable logic, it is easy to see that the capital gains tax is nothing but a burden on our economy.
At the moment, the highest marginal capital gains tax rate is at 15%. If you believe helping business to prosper is the key to economic recovery, you will agree with me when I say the capital gains tax rate needs to be lowered dramatically. I believe we should have a simple flat rate capital gains tax rate of 8%. This solution would close any loopholes, tax shelters, and would eliminate any other means of avoiding taxation, thus increasing the tax base and revenues. But lowering the capital gains tax has also had a historical record of increasing revenues collected by the government. In 1981 the capital gains tax was cut and it led to an increase in revenues ¹. In 1997 the capital gains tax rate was once again lowered and once again revenues increased, due to the fact that more people were investing and taking risks (increased tax base.)¹. With that said, lowering the capital gains tax and issuing a flat rate capital gains tax is one solution which can help our country reach economic recovery. It will also give us a competitive advantage internationally, and it will help business here in America prosper by spurring investment, risk taking, and savings. Another solution could be to abolish the capital gains tax, which would lower revenues slightly, but increase economic output in other sectors of the economy by spurring investment, risk taking, and savings. This could also result in more revenues being collected elsewhere, simply because the economy and tax base would be expanding, while the amount of capital in the country would be increasing at amazing rates.
Sources:
CBO Capital Gains Historical Tables: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/38xx/doc3856/taxbrief2.pdf
