Everybody's Doing It: Abolish The Capital Gains Tax
 

By Rod D. Martin
April 17, 2006

How many times have we heard liberals exhorting America to act like the rest of the world?

For literally decades, the denizens of the left have been badgering us to adopt socialized medicine, abolish capital punishment, and support other "progressive" measures so we can appear more "enlightened" to their friends in Old Europe and other lovely places.

Never mind that their ideas are anything but progressive, particularly if by "progressive" we mean the achievement of actual progress. Hyper-progressive France, for instance, has had double-digit unemployment for most of the past quarter century, even with a 35-hour work week; its youth unemployment rate stands at 23 percent, its Muslim-heavy suburbs are 50 percent unemployed, and those relative few who do get to work pay a combined tax rate of 68 percent. They are little more than (very self-satisfied) serfs.

No wonder the whole world has been going the other direction for twenty years! The left's "enlightened" ideas invariably restrict individual freedom, weaken personal responsibility, sap private initiative, and empower government bureaucracies at the expense of the people they're supposed to serve.

But since everybody's doing it (and let's just ignore that vast world of countries which aren't so foolish), so must we. Thus speaketh John Kerry and his friends.

But for those of us with teenagers, we've heard this song before.

And the answer is always, or should always, be the same:

"No, young man/lady, everyone is not doing it -- and even if they were, that wouldn't make it right."

There is, however, at least one policy idea that much of the world has already embraced which liberals stridently oppose. And much like wearing clothes in public or not eating with your fingers, it's one of those things they ought to follow.

It's the abolition of the capital gains tax.

Of the thirty member nations of the Organization for Economic Cooperation and Development (OECD), fourteen don't have any individual capital gains tax at all: they have wisely chosen not to eat their seed corn, and to let their citizens build a future for themselves and for their families.

But don't expect liberals to join the crowd on this one. Most of them even opposed President Bush's reduction of the rate to 15 percent; and before the Easter recess, they again blocked efforts to make that tax cut permanent. Calls for abolition are met with the usual shrill class-warfare bleats that reform favors the rich -- even though working middle-class families would benefit most of all.

This is a case where we really ought to join the crowd.

The capital gains tax is the veritable poster child of unfairness, a gross example of double taxation at work. Corporate income is already taxed when earned. That income belongs to shareholders, most likely your IRA or other savings. So when Washington taxes it again when you sell your stock, you're getting hit a second time on the exact same money. Not some corporate fat cat somewhere. You.

The capital gains tax is a wealth destroyer, but in a much more insidious way than just this. The logic is straightforward. Anytime government taxes something, you get less of it. So when government taxes capital formation -- people investing their money so businesses can expand, research and hire -- it creates a colossal roadblock to entrepreneurship and a huge disincentive for investment, the essential building blocks of prosperity for any family or nation.

What's true logically has proven to be tragically obvious empirically. As just one example, when Washington raised the capital gains tax rate from 20 percent to 28 percent in 1986, funding by venture capitalists plunged by almost 60 percent over the next five years.

And since so many developed or developing nations have no capital gains tax, ours places us at a serious disadvantage. Many worry about China, but do they consider that China is one of those OECD nations completely free of this wealth-destroying tax? In fact, those who wring their hands the most about Chinese competition are among the strongest opponents of abolition. But the absence of a capital gains tax is one of the key reasons for China's surging economy, and for its year-after-year nine percent growth rates (three times our own).

We could do the same thing here, unleashing a torrent of capital and business formation, job creation and prosperity. And while Leftists scream about "lost government revenues", all that new economic activity -- and all those new tax-paying workers -- would actually flood government coffers.

So there's every reason to abolish the capital gains tax.

And after all, everybody's doing it.

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