Thursday, October 4, 2012

On Capital Gains Taxes and Other Boring Things

Thomas Sowell explains something important that I think many do not understand in “Capital Gains Taxes.”  This is not a review of the article.  It is rather short, and relatively easy to understand.  In it, Sowell explains why lower income tax rates for capital gains is a fair policy.  It is not just a fair policy.  It is a policy that makes us all wealthier.

This is, unfortunately, an example of an idea that is important, but which most people will not take the time to understand.  And in not understanding it, they will often damage their own interests in the candidates for whom they will vote and the policies those candidates will promote.

It is akin to discussions of corporate tax rates, which are relatively very high in the United States.  Because people will not take the time to understand the matter, it becomes easy for the demagogue to cry, “Those rich corporations don’t pay their fair share of taxes!”  There is, of course, much more to the story.  Corporations attempt to make money for shareholders.  When shareholders receive it, they are taxed on it as income also.  So a good case can be made for not taxing corporations at all.  The shareholders will pay the tax when – and if – a profit is made.

There are a lot of things like this that people won’t bother to understand.  We are much like the Ray Barone character of “Everybody Loves Raymond.”  In one episode he has begun to handle the family checkbook and bill-paying.  He screws it up, of course.  When his friend tries to explain how to do it, all Ray gets is the word “accrued” (an in “accrued interest”).  The rest of it bores him, and he refuses to listen or learn.  As a result, his electricity is shut off.  He should have paid more attention.

I was once relaxing with a fine Christian gentleman who had been a hard-core union man before he retired.  As we chatted he launched into the evils of corporations making money.  I asked him, “What does your union pension fund invest in?”  The answer:  “Stocks and bonds.”  There was a pause.  Then he said, somewhat thoughtfully, “I suppose I really want corporations to make money, don’t I?”

And even beyond that, do you realize where we would be if there were no investors in companies?  We would be poor – and that is probably an understatement.  Most of us would not even be here to be poor.  Invested money buys the tools that make all the material things we like possible.  So it makes sense, and is in everyone’s interest, to encourage investment via tax policy.

In a better world, taxes would be so low no one would notice them because government would be so small most people would seldom notice them.  But even in our big-government “taxed enough already” world, let’s not be so stupid as to promote tax policies that will make us all poorer.

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