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ABOLISH THE CAPITAL GAINS TAX
(Third in a Series)
by Rod D. Martin, 4 March 2004
In my ongoing series on making the flat tax a reality, I have noted that
there are five key reforms which must take place before a completely new
system can be enacted. Successful navigation of this "road map to reform" will
improve fairness while preparing the system for an entirely new tax code; it
will also teach average Americans -- and their legislators -- the lessons needed
to guide them toward the best possible change.
Item one on the agenda: elimination of the double tax on capital gains.
Unfair to everyone, the capital gains tax hits poor and middle class
Americans hardest: any time you sell an investment -- whether it's your
home, your small business, or something you set aside for a rainy day, Uncle
Sam takes a bite, which can range as high as the very top tax rate.
Double taxation is wrong, and this is surely it. You've already been taxed
on your income: now, when you save or invest it, Washington picks your
pocket again. How can anyone not already wealthy ever expect to achieve the
American Dream?
But the foolishness of this tax is worse than its unfairness. By penalizing
successful investing, the capital gains tax reduces the amount of capital
available to start and expand businesses, particularly the small businesses
which employ 80% of all Americans. And for existing companies, the tax
lowers productivity and raises prices for every consumer, two additional
"hidden" taxes on us all.
It's no surprise that over the past quarter century, whenever we cut capital
gains taxes, economic growth increased.
But what is surprising is just how badly this tax devours wealth. Recent
studies show that, for every dollar in capital gains tax collected, ten
dollars of GDP is lost. That means, for example, that in 2000 -- while
stocks were crashing and we were entering a needless recession -- when
government extracted its $110 billion worth of capital gains taxes from us,
it destroyed over $1 trillion of our GDP: businesses, retirement savings,
jobs.
Clearly, the status quo is intolerable.
That is why my Vanguard PAC has joined Grover Norquist's Americans for Tax
Reform and an ever-growing group of Congressmen and Senators in forming the Zero
Capital Gains Tax Congressional Caucus.
While it may take years to deflect this dagger from the heart of our
economy, President Bush and the Republican Congress have already made great
progress, significantly reducing the capital gains tax just last year.
What's more, supply-side conservatives were joined by moderates and
conservative Democrats, many of whom had been skeptics in the past.
But there is still much more to be done.
While the tax still exists, for instance, one important goal we must achieve
is inflation indexing. As Ronald Reagan taught us, the lack of indexing
subjects long-term investors -- particularly small savers and "Mom & Pop"
business owners to serious inflation risk.
An example: if you had invested $1000 in 1980 and had sold that investment for
$2000 in 1996, your after-inflation gain would have been just $241. Of the
$1000 in nominal profit earned, a whopping $759 would have been lost to
inflation.
Yet you would have been taxed on the entire $1000.
Clearly, the failure to index encourages speculation and discourages
long-term investment. It also helps make America a country of spenders
instead of savers: with savings accounts and similar investments returning
the rate of inflation or less, the capital gains tax can easily wipe out the
little guy: no matter how much he saves, he can never get ahead. So on
average, he doesn't save, thanks to the "wisdom" of Uncle Sam.
Unfair? You bet. And as unnecessary as it is unfair.
Our Zero Capital Gains Tax Caucus advocates Congressional action to
introduce indexing by law. Nevertheless, we are open to other remedies. In
1992, a National Chamber Foundation study concluded that the U.S. Treasury has
the legal power to index capital gains for inflation by regulation. Every
American should tell the President: it's time to get this done.
In the coming months and years, as more Americans own homes, investments, and
small businesses than ever before, the arguments for capital gains tax abolition
will resonate across the nation. It's up to us all to make these arguments
clearly and persuasively, and to elect men and women of conviction who will help
make abolition a reality. No matter what the Left may say, this is not a matter
of "taking care of the rich": the rich always find a way to take care of
themselves. Our interest is in including every American in our country's
birthright: the hope, growth and opportunity freedom provides.
Our representative government should not be an obstacle to that success: it
should enable it.
Copyright: Rod D. Martin, 4 March 2004.
-- Rod D. Martin, Founder and Chairman of Vanguard PAC
(http://www.theVanguard.org),
is an attorney and writer from
Little Rock, Arkansas. A former policy director to Arkansas Gov.
Mike Huckabee and Special Counsel to PayPal.com Founder Peter
Thiel, he is the Center for Cultural Leadership's Senior Fellow
in Public Policy and Political Affairs and a Vice President of
the National Federation of Republican Assemblies (NFRA).
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