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Add to FavoritesContrary to popular belief, incentives to cut consumption and save do not encourage investment and spur economic growth. By diverting consumption income to investment, the investments themselves are made less financially feasible for the simple reason that when people save instead of spending, producers do not sell.
The idea that capital can only be formed (investments financed) by cutting current consumption and saving, then investing is fixed into U.S. tax policy, largely due to the influence of John Maynard Keynes, the economic architect of the New Deal. It was Keynes' unquestioned assumption that, "The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably. (John Maynard Keynes, The Economic Consequences of the Peace, 1919, Chapter 2, Section III.)
In 1935, in response to Keynes' influence on the New Deal recovery programs for the Great Depression, Dr. Harold G. Moulton of the Brookings Institution in Washington, DC, investigated the claim that it was only possible to form capital by saving, then investing. By tracking consumption and investment from the 1830s to the 1930s, Dr. Moulton discovered something surprising. If capital could only be formed by first saving, then investing, he should have found that periods of increased investment were, in each and every case, preceded by periods of greatly decreased consumption.
On the contrary, what Dr. Moulton found - in each and every case! - was that periods of increased investment were preceded by greatly INCREASED consumption! That is, instead of savings being accumulated then invested, savings were being depleted.
Where, then, does the money come from for the increased investment?
Dr. Moulton pointed out that the money for the increased investment had been created by the banking system, using classic techniques of banks of issue and central banking. That is, a borrower with a "sound" productive project obtained a loan from a commercial bank. The money to purchase the note was created by the bank, which took the note on the project (and some collateral) as security. The borrower took the money, invested it, and when the project began to pay off, used the income to repay the principal and interest on the loan (and afterwards to spend on consumption). The bank would take the interest as its profit, and cancel the money, thereby avoiding both inflation and deflation. This process is described in Dr. Moulton's book, "The Formation of Capital," in which he published his findings in 1935.
Taking Dr. Moulton's findings into consideration, cutting consumption in order to invest is therefore contrary to a sound policy of creating money as needed through the banking system. It is also contrary to the best interests of the economy as a whole - spending less in order to save then invest means that producers (and thus investors) will not make as much income ... if any.
Consequently, taxing capital gains, dividends, and every other form of income, however derived, at the same rate is the only just method of taxation - given a reliance on bank credit rather than past savings to form capital.
Changing to a program such as "capital homesteading" away from the current reliance on existing accumulations of savings (which should be spent to encourage economic growth, per Dr. Moulton's findings) would go a long way toward encouraging investment and promoting economic growth. The alternative is to continue to rely on financing growth in ways that actually inhibit growth, and cut off the greater part of the American (or any other) people from participation in the economic system as both workers and owners.
Learn more about this author, Michael Greaney.
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Yes
According to Wikipedia, a capital gain is "profit that results from the sale of a capital asset over its purchase price". What this means in layman's terms is that if you purchase a piece of real estate such as a house for $100,000 and then in 5 years you sell it for $125,000, you have a capital gain of $25,000 which you will then owe taxes on.
Capital gains also refer to the gains made in the stock market. If I purchase 10 shares of Intel stock for $10 a piece and then a year later am able to sell those 10 shares for $20 each I have a capital gain of $100 (My total cost basis was $100 on those shares and I sold them for $200).
The reason that I feel that increasing the capital gains taxes will discourage investment is that the United States is currently in or close to a recession that was caused by credit problems in the housing market. The housing market has had declining prices for the first time in years and many people no longer have equity in their houses, they are "flipped". What this means is that in the example above they may have paid $100,000 for the house and then when it was worth $125,000 they refinanced and took out a home equity loan (line of credit based on the capital value of your asset) and now their house has decreased in value down to say $110,000. Since their home loan is now more than the value of their house they are "flipped" on the house which has rarely occurred in the past (this is more typical with cars when you do not make a large down payment).
Since the housing market is already struggling, taxing any gains made by investing in the real estate market even more will discourage new buyers and also investment firms from purchasing houses being foreclosed on. We could end up with many houses where the bank is stuck with the house and unable to sell it, resulting in write-downs where the bank writes off the property as a complete loss even though they still have it! This is not a good thing for the American economy and has already been happening across the country as investment firms and major banks go under or have reported huge losses related to mortgage issues.
We do not need less people investing in this market right now, we need more. The overall investment environment related to capital assets such as real estate is very skittish right now and banks and individual investors are very cautious about investing in any of it. Higher taxes will not encourage more investment, instead investors will look elsewhere to find ways to earn money such as through dividend bearing stocks which are taxed differently.
Another reason we don't want increased capital gains taxes is that it will have a trickle down effect. Remember those dividend bearing stocks I mentioned as an alternative to buy low sell high stocks? Well, many of those dividend bearing stocks are involved in real estate and increasing capital gains taxes could cut into their profits, reducing the dividends that they are able to pay out to investors.
The final reason I think capital gains taxes going up would be an issue is that it would discourage individual Americans from investing in stocks as an alternate form of retirement planning. If an investor already has a Roth 401k or Roth IRA then they do not have to pay any capital gains taxes on the profits which is the whole point of the "Roth" type of investments. However, you are severely limited in how much you can put in your Roth each year. Currently if you are less than age 50 you can contribute only $5,000 per year into the Roth IRA and only $6,000 per year if you are above age 50. Contributions are phased out entirely if you make too much money each year so it is vital that there is an alternative place that people can fund to plan for retirement since you are limited to severely in how much you can put into your IRA each year.
One other key thing to note in regards to economic growth and taxation is that lower taxes actually INCREASE government revenues as proved by the 1995 Joint Economic Committee's analysis of Bush/Clinton fiscal policies compared to Reagan. By lowering taxes, you create more jobs and more economic growth which results in greater federal revenues as compared to increasing taxes! This idea seems backward but is backed up by years of factual data on the results of various tax increases and decreases.
Source:
htt p://www.house.gov/je c/growth/taxpol/taxp ol.htm
Learn more about this author, N. Dawson.
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