Republican Tax Lie #4: “Reducing investment taxes is beneficial”

[The following excerpt is from my book, “Rescuing Religion from Republican Reason.”]

Capital Gains Taxes

I’ve heard some Christian Republicans say it’s morally wrong to tax capital gains, as if it doesn’t count as income. This is nonsense. Let’s say you buy a restaurant for a million dollars. You own it for five years and make nice profits from your customers. Then you sell the restaurant for 2 million dollars. So, in addition to your operational profits, you get a bonus of 1 million dollars when you sell the place. Why should that money not be taxed?

Some will say the Bible has no capital gains tax, so neither should we. In the Bible, however, all Israelite males inherited land; they never paid for it. And most land sales were made to pay off debts, not to get rich. And then, every fifty years, in the Year of Jubilee, lands had to be given back to their original owners or their descendants, so all land deals were temporary, not permanent. It’s quite a different set up from what we have today. Also, the Israelites had no stock market, which, as I stated before, is founded on liability protection for the shareholder. The fact that you receive liability protection when you buy stock is all the more reason why you should pay taxes on your gains.

Those who argue against capital gains cuts plead the cause of the rich, not the needy. They’ll say almost everyone benefits from a capital gains cut, because a lot of lower income people have a 401k that invests in stocks. This is true to a small extent, but 96% of capital gains are realized by people earning over $100,000 per year and 67% from those earning over $1,000,000. Capital gains tax cuts clearly favor the rich.

Republicans proclaim that capital gains cuts make the stock market boom, and that’s good for everyone. Indeed, it makes investors richer, but it’s less beneficial to low income non-investors. What they fail to proclaim is that economic crashes, which hurt the working class, follow soon after. Three of the four biggest stock market meltdowns of the past century were preceded by large capital gains tax cuts within 5 years prior. After most WWI debts had been paid, the Harding and Coolidge administrations gradually lowered taxes (capital gains were taxed the same as income back then) from a top marginal rate of 73% in 1921 to 25% in 1925. For 5 years, the Dow soared from a value of 100 in 1924 to 380 in 1929, but then came the massive crash that ushered in the Great Depression. In 1997, the capital gains rate was cut from 28% to 20% to encourage investing, even though the Dow had already grown from 4000 in January of 1994 to 6000 in January of 1996. Three years after the cut, the market crashed again in what some call the Dot-Com Bust. In 2003, capital gains were cut to 15% to help the market rebound, but 5 years later, the market crashed again, losing half its value. One might argue that this crash was due to the housing bubble, but let’s not forget that tax savings from the Bush tax cuts were often invested in real estate, where capital gains rates also apply, because people were afraid to invest in stocks after the Dot-Com Crash. Crashes like these will continue as long as there’s insufficient consumer spending money to buy the products that stock investments create.

Lower tax rates are a horrible reason to invest in stocks. What happens after a capital gains tax cut is that people rush to invest without caution, because they anticipate the market will boom due to the lower tax rate. So many people think this will happen that it actually does. In fact, Republicans love to point out how capital gains tax revenues increased even though the rate decreased. But this is only temporary. Eventually, the stocks become overvalued, and the prices plummet, causing a panic and crashing the market and the economy along with it. A smart investor invests in a company’s stock because he expects the company to become profitable, and he wants to become part-owner of it (which is what happens when you buy stock), so he can share in the profits (dividends). That’s the only legitimate reason to invest in stocks.

Unfortunately, every time a Republican gets elected president, his first order of business is to lower taxes in the name of boosting the economy. If he doesn’t cut spending to match, the economy will heat up, maybe even become too hot, but then it will return to recession as it has at least once in every decade in U.S. history. When it does, the tax rates are so low that the government can’t come close to paying its bills, and the nation’s debt skyrockets. All that’s accomplished in the end is an increase in the gap between the rich and the working class, which I believe is the ultimate goal of the Republicans and the wealthy people they represent. Tax cuts should not be used to manipulate the short term economy, just so a new president can get re-elected in 4 years. They should be set at a rate that’s fair and can pay the nation’s bills and be left at that rate.

Perhaps the discussion should not be whether tax revenues increase every time we cut capital gains tax rates. Perhaps, instead, we should examine which capital gains tax rate is most effective over the long haul at maximizing revenue, and then stick with that rate. Let’s compare the 20% rate instated in May 1997 to the 15% rate of May 2003 (these numbers come from the most recent capital gains study at the Treasury Department website that goes through 2009). And let’s compare the amount of capital gains realized (not taxes paid, but gains reported) under each rate as a percentage of GDP (GDP comparisons allows us to factor out inflation that would make more recent numbers larger than older ones). What we find is that the average capital gains realizations as a percentage of GDP from 1998-2002, under the 20% rate, were 4.28% per year. Under the 15% rate from 2004-2009, the realizations were also, amazingly, 4.28% per year. (Both periods, by the way, started with a stock market boom and ended with a bust, so we’re comparing similar situations.) In other words, the 15% tax rate did not produce the slightest bit higher capital gains realizations than did the 20% tax rate. All it did was tax the gains at a lower rate and decrease tax revenue. The 20% rate provides investors with all of the tax incentives they need to encourage investing, and lower rates add no further incentives. So it appears that rates below 20% do nothing to increase capital gains realizations, and rates over 20% (such as the 28% rate from 1987-1997) hurt realizations. Thus, 20% is the optimal capital gains rate. So let’s stick with it!

The Tea Party Religion

So, again, the Republican claim that tax cuts always pay for themselves is untrue. So are the claims that taxes hurt the economy, that Democrats spend more than Republicans, that low tax countries fare best, and that income taxes are evil. These deceptions, along with all Tea Party anti-tax rhetoric, are rooted in a single motive – the love of money. As Ecclesiastes 5:10-11 says, “He who loves money will not be satisfied with money, nor he who loves abundance with its income. This too is vanity. When good things increase, those who consume them increase; so what is the advantage to their owners except to look on (‘see them with his eyes’ in the NRSV)?”

Human nature hasn’t changed one bit since Old Testament times. Worshipers of wealth still can’t get enough. And today, they run a 24 hour-a-day propaganda campaign to get voters to favor their greed over others’ needs. The new religion they’ve established is called the Tea Party. At its heart is loving money so much that paying taxes makes your blood boil, especially when you suspect that your tax money will go to someone you think is less worthy than yourself. If this describes you, then you love money more than God. And Jesus made it clear that you can’t serve both God and money. You’ll love one master and hate the other.

I understand it stings a little to see a significant chunk of your pay taken from your paycheck. The next time you have that feeling, just remember that the rest of us pay taxes, too. And those who don’t are usually not in enviable positions. If we all stopped paying taxes tomorrow, we’d all have more money to bid on houses and cars, which would simply drive up prices. More money wouldn’t create more goods, houses, or land. It would just mean that we all pay more for them. (Of course, on the back end, everyone who works for the government or companies that are contracted by the government would lose their jobs, and entitlements would go away, taking money back out of the economy and crashing it.) If you make enough money to pay one of the higher tax rates, your life is pretty good, at least financially speaking. You have far more comfort, enjoyment, and good food than anyone in the Bible ever did. Appreciate what you have, thank God for it, and focus your energies on the well-being of others rather than on your efforts to hoard wealth.