by Paul Kemp

Created on: December 20, 2007

As I write this, credit for any purpose is drying up in America. Our economy, unfortunately runs on credit. I say "unfortunately" because most Americans have so little in savings, that without access to cheap interest rate loans to consume products, our economy is going to take a dive over the next year or more.

Why do Americans depend on credit to buy things? It's because of two reasons. One is that we have little sense of frugality, so we spend all we earn and all we can borrow. But there is also another reason we don't have much money: It's because our government directly and indirectly takes so much of our earnings in taxes. For example, my last phone/DSL bill was twenty percent higher because of taxes!

My point is that taxes are hidden in the cost of everything we buy, driving up the price and leaving us less to save. So, the average worker is marginally less able to save money which could be put to work in a capital investment such as stocks or a business venture.

If more of us had more savings, then we could invest in productive businesses that would create jobs, require the purchase of supplies, produce a useful (we hope) product, and eventually pay taxes on the profits. That's the process that builds our economy without the risks of borrowing the money.

So...if an individual scrimps and saves money and does an economically commendable thing by creating a successful business, causing the value of his investment to grow, what reward does that person get for risking his or her own money, time, and savings? They will get hit when they sell the business for capital gains taxes, which decrease the capital available for future business creation and expansion.

In the more common case of stock market or commodity investments, the same scenario holds true: You save, invest wisely, take the risk, pay the fees to brokers, keep tax records, and at the end, the tax man steps in and takes about twenty percent of your profits. That makes it harder for you, the heroic creator of wealth, to get ahead. I fail to see what service various levels of government provided that justify them collecting a part of your profits.

The government, at all levels, seems to think it is our helpful partner in our business, and as such should receive a piece of the action. Why is that? They made it hard to accumulate the starting capital. They made us pay license fees and comply with various regulations, such as the Americans with Disabilities Act, that make it very hard to start and run a successful small business. We and our employees paid income taxes on the money we took out of the business. We have taken all the risks and the bureaucrats have tried to collect fees at every turn. Why should we be penalized for doing something that requires rare discipline, skill, and perseverance?

So, yes, definitely capital gains taxes inhibit economic growth because they soak up money that could have been put to use in productive activity. From my point of view, little of what government does for us is "productive." That is, unless you consider keeping bureaucrats employed and off the streets a productive use of our tax money.

In the final analysis, capital gains taxes are a clear case of double taxation. The earnings that were used to purchase the investment had already been taxed. The capital gains tax is a further deduction from the worthy purpose of employing your savings to help grow our economy. That is discouraging to an investor or business owner!

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