Of course it makes sense, on an instinctual level, that lower taxes encourage investment, everybody knows that. That’s common sense.
A fair reason for advantageous tax rates on long-term capital gains is based on the longer required holding period that distinguishes it from short-term speculation (also unfortunately termed “investment” by folks who are misinformed or ignorant of its actual meaning). Lower long-term capital gain tax rates encourage disinvest more slowly instead of just trying to extract income from the economy with no thought how they do it. The point isn’t that lower rates are good for investment. The point is that longer-term capital investment is superior to short-term activity and long-term should be encouraged.
But @HungryGuy is correct, the reason for lower taxes on capital gains is :“Because rich people contribute to politicians re-election campaigns.”
The fresh-from-MBA-school crowd wants us all to take an intro economics course, like they did.
I agree enthusiastically, because we will find there, in an economics department highly likely to be dominated by the Chicago School/Friedman/trickle-down cult, the roots of why so many of our current economic policies are so fucked up.
The problem is they’re wrong. “Common Sense”, reasoning with instincts, can be like that. And the continued influence of trickle-down pricks on global economies and the WorldBank and the IMF, has driven several national economies into the ground (Chile – finally recovering, Argentina- recovering after telling the international bankers to take a flying leap, Portugal, Iceland – recovering after letting their big banks default instead of saddling their taxpayers with the side-effects of bank misbehavior, Ireland, Spain, and famously now Greece).
The people who benefit from Friedmanism are few (yep, that less than 1%) and they don’t mind the consequences because they learned in BizSchool the religion that anything that is not a direct cost on the spreadsheet, that doesn’t diminish your own bottom line, doesn’t matter. Their most useful and prudent tool, by their values, is externalizing costs.
So, by all means take an intro economics course, but yo! keep learning y’all !! Take an advanced one or two or three. Read that isn’t based on theory written by the Freidmanism cult that look great on paper and appeal to the gut – and are wrong.
And fer Christ’s sake take a couple history courses. Spend some time outside the ‘financial engineering’ trough.
There are some among us who have already typed “nice liberal rant” into the AnswerThisQuestion. I expect that, robots are like that. Being dismissive is fun but it doesn’t help any of us. If you get all the way to the end of this post, and consider what’s written, then congratulations they have updated your algorithm.
Nobody pays a cent of tax on investment.
They pay tax on disinvestment. When you cash out. When you no longer have your capital working where it was.
If you like a gut-based, instinctual, comon-sense analysis about encouraging investment that’s backed by fact, great, let’s work with our powerful friend, self-interest=GREED in an innocent form (greed is good, woohoo! It is extremely motivating and it can in fact be used to ends that are beneficial to all involved).
The historical fact is that ALL our periods of greater prosperity (unless you ignore prosperity fueled when insane deficit spending is ignored, e.g. the reigns of Reagan and GW Bush, and deficit momentum spilled over into the current term) have been when tax rates are relatively high, (all kinds, capital gains, personal income, corporate income).
How could that possibly be? Our friend greed notices that when taxes are high people should leave their capital where it is to avoid those taxes. They are forced to think longer term to maximize their returns. The capital stays in a company, growing wealth and tangible value, – and creating jobs by the way. Folks will pay a lot more attention to where they put their capital and may even take active management or shareholder activist roles is making sure wealth is getting created and wealth is growing in the companies in which they have invested. This is a fact, this is what happens in periods of higher taxation. Greed demands it.
During periods when tax rates are lower, there are more advantages to getting capital out as soon as a profit is possible. If you are fortunate enough to have large heaps of capital, you also have tax attorneys who will tell you to get your money out while you can. Shareholders will take profits (sell, dis-invest) and CEOs will take huge salaries instead of leaving their wealth in the company and making sure it is cultivated. This forces companies into cost-cutting – killing jobs by the way. This is a fact, this is what happens in periods of lower taxation. Greed demands it.
@zenvelo is correct the secondary markets are largely useless to anyone but the parasite class. The fact that ratings are dependent on market valuations at all, instead of fundamentals or even P&L points to the circular corruption of our system ever since ratings firms stopped being independent of the firms they rate.
Those are facts and there is no period in US history where the contrary is demonstrated.
Tax rates on short-term capital gains should be through the roof to get the parasites out of our systems.
If the intention is to encourage investment, then you want to set tax rates of all kinds high enough to discourage speculation and lower capital churn rates.
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