<p>"Singapore and Hong Kong (along with many other countries) have no capital gains taxes. How are their economies doing? Singapore’s unemployment rate is 2%. Hong Kong’s is 3%. "</p>
<p>This is classic statistical noise, it is claiming causal link between two statistics, and that is they have low unemployment, must be because they have no capital gains…and that is bogus, because there are countries with no capital gains who are in deep trouble. Hong Kong and Singapore’s economies are different then ours. We could cut the capital gains tax rate to 0 in this country, and I am pretty sure all it would do is make speculative trading and the like even more prevalent, more funny money, and few jobs would be created (the capital gains tax rate cut to 15% is basically not credited with creating many jobs, during the period in question the net on jobs was a major loss of them)</p>
<p>The problem with that in part is just what does a cut in capital gains taxes (or eliminating) them do? The theory is, like tax cuts in general, is it will stimulate capital formation that will go into creating new businesses (through an IPO), it will allow companies to expand and so forth. The problem with this is that in terms of business, very little operating capital for the most part comes from where capital gains comes in, few companies to finance expansion and such issue new stock to pay for capital improvements,they use other means these days. Put it this way, most of the stock you see being traded has been there a long,long time, and IPO traffic while it does raise capital, is not likely to increase the amount of spending on capital companies would do to expand. </p>
<p>The real problem with capital gains is that a lot of investment these days is speculative, rather then being about raising money to help a company expand, etc, it is speculating on where for example stocks are going…and it also tends to encourage behavior not necessarily good:</p>
<p>-The lowered capital gains rate that happened during the Bush administration often seems to have gone, rather then to capital formation, into risky, high yield investments . Leaving out hedge fund managers a second, those who invest in hedge funds and the like, that are heavily leveraged in speculation in things like derivatives, can hold onto their investments for a year and get the lower rate, when what they invested in has very little to do with capital formation (and before calling this liberal tripe, anti business, do some net searches…this has been coming out of conservative circles who were some of the biggest supporters of capital gains tax cuts…and worried about it going into speculation).</p>
<p>-Corporate compensation these days, especially for the ones running the show, tends to be in stock grants and options. The problem with these grants is that with a 15% lowered capital gains rate, a CEO can get most of their compensation in stock (or options), and see a lowered tax rate only a year later on gains. What this does is give executives incentive to pump up the stock price within that year and then be able to pull out at a lower tax rate; if taxed at ordinary income rates, they might be forced to think of the tax consequences and spread it out more long term and not have incentive to ‘pump it up’ (that among other things, encourages the opposite, laying off employees, etc, to 'pump up the price).</p>
<p>-The other problem is that it doesn’t even stimulate demand (the other side of the equation). That extra 20% not paid in taxes would in theory help pump up the economy, stimulate demand. The problem is that most such income goes to a very small group of people in terms of numbers, and therefore won’t stimulate demand either. Despite the fictions I have heard, very few people in this country get significant income from stocks and such subject to capital gains, they hold too little, even if you consider individual stock holding combined with pension accounts and mutual funds, it basically doesn’t do all that much among the people who in fact stimulate demand (known as the multiplier effect; put a dollar in the hands of the, top 1%, stimulates maybe buck fifty in economic activity; give it to middle class people, 5-6 dollars). . When you give a pop to a small group like that in numbers, even though it is a lot of money, it doesn’t do much)</p>
<p>-Then, of course, we have the example of hedge fund managers whose income from running the funds, thanks to some sort of weird government ruling, is taxes at the capital gains tax rate…and no one has been able to explain to me how that benefits anyone but hedge fund managers paying a lower tax rate then many other people do who make a lot, lot less…</p>
<p>There are real issues with our tax code, we hear about how the US has the highest nominal corporate tax rates, Fox News yells that from the rooftops and the tea party type bleat it like the sheep in “Animal Farm”, but that also leaves out is that the real rates are a lot less, and also leaves out that other countries nominal rates are lower, but they also don’t have the deductions either…and when you compare real rates of taxes, US corporate tax rates are pretty low… I would argue that it would be better to get rid of the byzantine tax code companies use and abuse, and make the rate lower but with no deductions…</p>
<p>The real issue with tax cuts has always been that they often do it broad based without thinking of what they are trying to do. If you want a tax cut to stimulate capital formation, or stimulate demand, then put it where it will do the most good. If someone buys IBM stock and keeps it a year, they aren’t stimulating capital formation since that stock is old and dusty, but if someone IPO’s a promising company, that is capital formation and should be rewarded. Hedge fund managers paying 15% doesn’t stimulate capital formation one whit, and it doesn’t stimulate demand either, better giving a tax cut to the middle class to stimulate demand then the top 1%, who simply don’t consume enough to stimulate much of anything. Giving tax breaks to corporations who are sitting on tons of cash and record profits isn’t going to stimulate job creation; and most of all, broad based tax cuts, especially the way they have been done for 30 years, when you look at what they stimulated didn’t stimulate long term capital formation and also ended up causing the budget deficits we see…</p>
<p>Tax cuts are a tool, and can be effective, but the problem with our tax code and policy is that it often works against the very thing it claims to be doing, among other things it has caused a concentration of income and wealth in a very small sector of the population, and that is not healthy. The top 1% of households now have somewhere between 80 and 90% of all wealth, and more then 24% of all income (that includes wages and investments), and that income figure is the most troubling, compare that to the 9% that used to be at the top and that is a lot of money concentrated in too few hands.</p>