If nothing else, pay attention to one line in this video by my friend Dan Mitchell of the Center for Freedom and Prosperity: “No wonder Americans don’t save enough.” As Dan explains in this video proposing a repeal of the capital-gains tax, it simply doesn’t pay to save any more. Income from savings derives from monies already subjected to an income tax, which means that a capital-gains tax is a form of double taxation. The system rewards consumerism and consumption rather than savings and investment — exactly the criticism many have of Americans today:
The correct capital gains tax rate is zero because there should be no double taxation of income that is saved and invested. This is why all pro-growth tax reform plans, such as the flat tax and national sales tax, eliminate the capital gains tax. Unfortunately, the President wants to boost the official capital gains tax rate to 20 percent, and that is in addition to the higher tax rate on capital gains included in the government-run healthcare legislation.
Instead of lowering or eliminating the capital-gains tax, the Obama administration has proposed increasing it. With the economy flat on its back, we need capital to flow back into the markets. The best way to do this is to remove the disincentives on investment instead of increasing them. As investments succeed, more people will find jobs, which will boost tax revenues accordingly. Increasing the penalties will keep investors on the sidelines.
One other critical takeaway is Dan’s warning on inflation. The capital-gains tax applies to the nominal value of the initial investment, not the true value after adjusting for inflation. That puts pressure on investors to seek short-term gains in inflationary periods rather than invest for the long term. As our debt skyrockets, one option open to the government would be to allow inflation to run wild for a while to lower the true value of our debt. That will also create a massive handicap against investors, as their paper gains will look enormous while their actual gains remain small or nonexistent — and will allow the government to take larger amounts of capital out of the private sector without actually increasing cap-gains tax rates any further.