By Rep. Adam Putnam (R-Fla.)
Posted: 03/24/09 03:30 PM [ET]
Among all the spending and taxing ideas in President Obama’s budget is one that that deserves a short and swift dismissal by anyone interested in returning this economy to sound footing: a 33 percent increase in the effective long-term capital gains tax from 15 percent to 20 percent.
We shouldn’t be too surprised. During the campaign, Mr. Obama said very bluntly that increasing the capital gains tax was on the table. He even suggested that he might support nearly doubling the tax, possibly rolling it all the way back up as high as 28 percent.
Let’s hope this is one campaign promise he is not able to keep. Any increase in capital gains taxes, especially at this point in our current economic crisis, would be precisely the wrong step at the wrong time.
In fact, if anything, we should be considering further reductions in capital gains taxes. My colleague Rep. Paul Ryan (R-Wis.) has proposed eliminating the tax altogether.
Here’s the argument Mr. Obama and other supporters of capital gains taxes make: Keeping this tax low, or reducing it further, is unfair because it tends to benefit wealthier people who are investors. It’s an argument that seems geared more toward the politics of 10-second sound bites than toward sound economic analysis.
The growth that equity markets experienced over a decade has essentially been erased over the past few months. At a time Americans’ retirement savings, college funds and other assets have been depleted by more than a third, the last thing the government should do is discourage investment in capital.
In fact, the government should be doing all it can to bring capital back into the market. And these days, investing in the nation’s businesses seems to require more courage, optimism and careful analysis than ever before.
That is why it is especially critical that we take measures to encourage the sound investment of capital. Without that investment, the economy’s engine is starving for fuel. These are the investments that help the manufacturer buy new, more efficient machinery. These are the investments that help the software firm market the programs that help other businesses improve productivity. These are the investments that make workers more productive, allowing them to earn higher wages or compete more effectively against lower-paid foreign workers.
Why would we want to do anything that even slightly discourages investment in this environment? Will this raise a great deal of money for the federal government? No. Revenue from the capital gains tax amounts to only 3 or 4 percent of all federal revenue.
Will it erase some fundamental tax loophole for which working-class Americans are paying? No. The money that goes into capital has already been taxed once when it was earned. The capital gains tax in essence hits it a second time, penalizing it for having been invested well. In fact, some economists say the tax should really be called a tax on productivity, investment and capital accumulation.
Will the federal government be forgoing significant revenue at a time of growing deficits? No. A peculiar aspect of the capital gains tax is that it only is paid when the asset is sold. If the sale is delayed, the tax doesn’t get collected and the value that was created doesn’t get reinvested in the economy.
If anything, we should be following Mr. Ryan’s advice and cutting the capital gains tax even further, sending a clear message to investors, savers and retirees that we won’t punish thrift. A cut can increase investment, which in turn will increase output and real wages.
A cut would encourage the sale of capital that has been “locked up,” which would free up money to be reinvested in the economy.
And by spurring the economy when it needs it most and unlocking any unrealized capital gains, the federal government would stand to collect taxes it might not otherwise. In fact, historically, every capital gains tax cut has resulted in higher revenues while every hike has lowered them.
The wisdom of cutting the capital gains tax was understood by then-President Clinton, who agreed to roll back this tax on productivity, investment and capital accumulation from 28 percent to 20 percent. And then a few years later, President Bush lowered it still further to its current rate. And the result both times has been to strengthen our economy.
So why is the new administration thinking of hiking the capital gains tax at the very moment when we need investors in the marketplace? Let’s drop the class-warfare rhetoric and keep tax rates low.
Putnam, former chairman of the House Republican Conference, is a member of the House Financial Services Committee.
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