Will Increased Capital Gains Taxes Discourage Investment and Inhibit Economic – Yes

Capital gains: profits made from investing, primarily in equities instruments. Secondarily, capital gains include interest on savings accounts, IRAs, 401-series accounts, Certificates of Deposit…the kinds of accounts held by tens of millions of regular Americans. Capital gains taxation also applies to the sale of homes, property, and other tangibles.

The concept behind capital gains taxes is simply that money earned by investing money is less noble, less honest than money earned by sweat and labor. The notion is, of course, populist and socialist. Capital gains taxation is both a way to raise additional governmental revenue and bash the evil rich – a baseline tool for the generating and justifying class envy and class warfare that certain political groups and some politicians employ for gaining and retaining political power.

Every organization, whether for-profit or not-for-profit requires three elements to make it functional: capital, management and labor. The three elements are co-equal and if one of the trio is missing the organization fails. The best example in recent years is the now-failed and collapsed Soviet Union. By definition, the Soviets despised capital…the notion of making a profit was as close to a sin as anything in the Soviet sphere. That nation, a behemoth that spanned 11 time zones and encompassed more than half of Eurasia should have been the global economic engine but it was, at best, a depressed state…at worst, a Fourth World cesspool of hopelessness.

Led primarily by Byelo-Russians, the Soviet Union had vast natural resources, an abundance of labor, at least minimally adequate transportation systems, a management class (Communist Party members) and when the country launched there was a capital and capital goods stock adequate to begin moving the giant nation into the modern industrial age.

Of course, politics Russian-style got in the way of national development, but even so; the Soviets made huge advances in developing their heavy industries and for a third of the 20th Century, dazzled the world and created hordes of devotees to Soviet Communism. But there was a three-part problem simmering below the surface: the Soviets were consuming their initial capital, not creating new capital and they were hostile to acquiring outside capital through investment.

In the end, the empire collapsed because real money – the fully convertible currencies they needed to acquire new capital goods and develop new technologies through production and sale for profit – was not available to the national leadership group. Labor was never a problem…resource availability was never a problem…management, though problematic and not high-quality, was never in short supply…Only capital, the life-blood of any economy, was absent.

There’s a lesson in that story and it is this: people and institutions are fairly cautious about how and where they invest, and without investment even the greatest of economies will eventually fail.

International investors already know that the United States is a tax bargain only in comparison to the European Union. Domestic investors, especially small investors, probably aren’t aware that the US has the second-highest marginal tax rates and specified tax structures in the industrialized world. The only things that have drawn international investment dollars to our shores have been our long-term stability both politically and in our industrial structural durability. We have been predictable and the greatest generator of profits. But the United States faces significant challenges from Asian Dragon nations, the emerging former Warsaw Pact bloc of nations, even certain African nations. These countries, though less stable than the United States, are offering sweetheart deals in return for influxes of foreign investment.

In the Irish Republic, long the basket case of Western European economies, for example, the Dublin government began offering zero-rate or very low-rate capital gains deals in order to attract Continental and Middle Eastern investment. In addition, the Dublin government reduced several important costs of doing business and guaranteed stable, predictable business costs for specific periods of time.

Many American companies missed-out on the deals Dublin offered because our Congress has imposed confiscatory taxes levied on foreign-earned investments, so these American companies opted not to put money and resources into the Irish Republic because most of their potential profit would be skimmed-off by government.

Once word of the great deals to be had in the Irish Republic got out, the money rushed-in to fill the vacuum, and today the Irish Republic is the proud possessor of the highest standard of living in the European Union, the lowest inflation rate in the EU, and among the lowest unemployment rates in all of Europe.

There’s a second lesson in that story and it is this: high tax rates do not raise revenues and they, in fact, depress revenues, discourage business owners to take risks, to expand or even to introduce new technologies.

Money is never free; it is earned and because it is earned its owners value it. Capital is the key to industrial development, to creating and sustaining jobs, to scientific, medical and technological progress, to academic excellence in institutions of learning, and to every aspect of life. Money, when put to work is always at-risk and because no venture is ‘sure-fire,’ and the capital money can disappear into the ether if the venture falters, investors need to know that they will be able to earn an adequate return on the investment.

When government even implies that it will take a larger unearned share of the cash flow, investors will take their money to some other place where they will have the opportunity to keep a greater net return for the risk to which they have put their money.

If the US raises capital gains taxes by even a few percentage points this nation will witness the greatest exodus of foreign investment money and the largest decline in domestic investment we have seen since the Great Depression of the 1930s…and we may get to participate in an Economic collapse of truly historic proportions.