I am currently reading “Exectutive Orders” by Tom Clancy. In this book the newly appointed secretary of the treasury is given the task of fixing some major tax law problems. One of his fixes is eliminating taxes on capital gains. It was expained that more money would be saved and or invested in businesses/business expansion if this was done making for a stronger economy. From my experience MrClancy seems to do most of his homework but would this be the actual outcome or is it mainly a “rich get richer” scenario like the opponents in the book suggest.
All taxes distort, but if you want to do income tax you need a capital gains tax that taxes capital gains as they accrue at the same rate as other sources forms and uses of income. Taxeing capital gains differently to other types of capital income (dividends, interest, bonus shares etc) is liable to be inefficient, require higher tax rates on other types of income to raise a given amount of revenue and fail to reflect equity insofar as economic position may be assessed by the proxy of market income.
Real world capital gains taxes may introduce additional distortions due to: deferral and lock-in problems related to capital gains taxes being levied on a realisations basis rather than an accruals basis; the lack of averaging provisions under a progressive tax; and the failure to adjust the tax base for inflation.
But the idea
But the idea that a capital gains tax is somehow bad for the economy is piffle. Whilst there are those who favour a consumption/ expenditure base over an income base, this involves removing all capital from the tax base, not just capital gains.
This is probably more appropriate for Great Debates.
That Mr. Clancy supports repeal fo capital gains taxes is hardly surprising…he’d likely be a huge recipient of that particular break.
That said it doesn’t make this a bad idea. This particular tax break has been bandied about over and over for ages and broadly speaking the issues are as you describe: more money for investment (thus 'trickle down theory) vs. rich get richer.
It would seem to me if you reduce capital gains taxes you should likewise reduce captial loss tax writeoffs. Fair is fair.
I’m sure someone with a deeper knowledge of this stuff will be along shortly.
Rather than get into the merits/demerits of elimination of the capital gains tax, which will surely throw this thread into Great Debates, I’ll take a stab at why Clancy has it in the book.
When the book was written the stock market was still in a strong bull session - lots of people had made lots of money. One way to almost instantly release that money for reinvestment, Christmas shopping, or whatever is to eliminate any tax on it. People now are not hesitant about selling their 1,000 shares of Cisco because of the huge tax bill that will come their way on April 15th. As a way of stimulating the economy by infusing it with large amounts of cash, it would work.
The result of taxing income but not gains (or with taxing gains at a lower rate than income) is that it encourages people to structure their earnings, artificially, as gains rather than income, and/or that it encourages people to live off speculation/investment rather than off trade, business or employment. The first consequence is certainly undesirable and consumes wealth and resources rather than creating them; the second may or may not be desable, depending on the needs of the economy. Does US industry suffer from lack of investment capital? Would the problem be alleviated by altering the taxation of personal gains? If so, there is a case to be made for reducing tax on gains, if not elminating it.
It is worth noting that many countries do tax gains at a lower rate than income, and a few exempt them altogether.
The underlined portion always struck me as a crucial assumption for the argument to lower capital gains taxes – if there is no lack of investment capital, the tax won’t improve things, but will still cost the government revenue.
Even lump-sum taxes?
Fair point js_africanus, but I don’t think any real-world tax is truly lump sum - if you follow Becker on fertility, poll taxes distort 
I guess head taxes, taxes on economic rent and pigovian taxes are all exceptions to my statement, but they are of little importance in terms of revenue (although an international carbon tax or a Tobin tax could change that I suppose).
Fair enough. I was just messing around. I enjoyed your insight on the capital gains tax. Best regards.
p.s. Last year’s Ig Nobel prize in economics went to “Joel Slemrod, of the University of Michigan Business School, and Wojciech Kopczuk, of University of British Columbia, for their conclusion that people find a way to postpone their deaths if that that would qualify them for a lower rate on the inheritance tax.” Talk about distortionary taxes! www.improbable.com/ig/ig-pastwinners.html#ig2001