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Weekend must-read



A Capital Gains Primer, WSJ op-ed. This is a timely and valuable discussion of why capital gains taxes should be as low as possible (and preferably zero). When Clinton says that tax rates like Romney's won't help the economy, he is making two grievous mistakes: he fails to understand why tax rates on capital must be low, and he assumes that government is able to manage the economy's scarce resources better than the owners and creators of those resources. Here's a quick summary of the key points in the op-ed:

Amid sluggish growth that has prompted the Federal Reserve into unlimited monetary easing, it is hard to imagine a worse time to raise the tax on capital investment. None other than Lord Keynes wrote that "the weakness of the inducement to invest has been at all times the key to the economic problem."
First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses. 
Second, capital gains aren't adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. 
Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. 
The main reason to tax capital investment at low rates is to encourage saving and investment.


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