Farewell, Jack Kemp

Former Congressman Jack Kemp was a tireless supporter of low capital gains taxes , its impact on creating an environment for entrepreneurship to flourish and the opportunity to provided for minorities and the disadvantages to get a piece of the American dream. He will be sorely missed as I noted in an obituary in Tax Notes.

Mark Bloomfield, CEO of the American Council for Capital Formation, said Kemp was "always the happier warrior, always looking for new ideas, always looking for allies." He mentioned Kemp's "constant enthusiasm" and "nonpartisanship, as opposed to bipartisanship," and praised his "dedication to making this a country of entrepreneurship."

Capital Gains Whoppers

Richard Rahn is a founder of the ACCF and served as its first executive director. He still serves as a current director today and continues to fight the good fight on important issues including the capital gains tax. In his most recent Washington Times column, he dispels myths and downright whoppers about the capital gains tax.

Apologists for the present capital gains tax, including many members of Congress, claim that because some, but not all, capital gains are taxed at a lower rate (which the president wants to increase) that part of the unfairness is offset. However, the effective rate (inflation-adjusted) is almost always much higher than the statutory rate, and the Tax Foundation found that at times the effective rate has been as high as 300 percent. 

Many studies, by both private and government researchers, have shown that often most of the tax is paid merely on inflationary gains, not real gains.

The apologists also ignore the fact that most capital gains are taxed multiple times. For instance, investors in corporate stock pay a tax on their investment funds when they earn the money; then the corporation pays federal, state and local taxes before investors are taxed once again on the same stream of earnings. This multiple taxation of capital results in lower productivity and job growth. 


Finally, the apologists claim the tax is paid only by the rich, which is another whopper. Anyone with a farm, small business or corporate stock - which includes most Americans - almost always pays capital gains taxes at some point. A person who has spent 30 years building a small business and sells it for $300,000 in order to retire is considered "rich" that year by the political left and the IRS...

Congress could easily stop the scam by permitting an inflation adjustment to the basis for a capital gain and allowing a full write-off of losses in the year in which they occur. Now is an ideal time to make these changes, given that capital-gains tax receipts will be very low because of the drop in the stock and real estate markets. If imaginary income were properly removed, these receipts would be close to zero.

G-20 Notes

As I drove home last night, I was listening to President Obama's post G-20 news conference. Two key points made during his Q&A struck me...

I think that there's always been a spectrum of opinion about how unfettered the free market is. And along that spectrum, I think there have been some who believe in very fierce regulation and are very suspicious of globalization, and there are others who think that it's always -- that the market is always king. And I think what we've learned here, but if anybody had been studying history they would have understood earlier, is that the market is the most effective mechanism for creating wealth and distributing resources to produce goods and services that history has ever known...

And this...

I strongly believe in a free-market system, and as I -- as I think people understand in America, at least, people don't resent the rich; they want to be rich. And that's good. But we want to make sure that there's mechanisms in place that holds people accountable and produces results...

Tax Real Gains, Not Inflationary Ones

In his recent column for Forbes, Bruce Bartlett has some good advice for those seeking to preserve low rates on capital gains--an indexing provision that differentiates real gains versus inflationary ones. With anticipated inflation around the corner, this may be a fight worth pursuing...

Some will say that paying 15%, the current capital gains tax rate, isn't much of a burden. But this ignores the fact that over time a lot of capital gains simply represent inflation. The late economist Robert Eisner calculated that the $3 trillion in nominal gains between 1946 and 1977 didn't even compensate for inflation over that period. Investors actually had a loss of $231 billion when their assets were adjusted for inflation.

This led Princeton economist Alan Blinder to conclude that "most capital gains are not gains of real purchasing power, but simply represent maintenance (or rather partial maintenance) of principal in an inflationary world."

This observation is confirmed by more recent data. According to a Congressional Budget Office study, taxpayers realized $72 billion in net nominal gains in 1993. But when adjusted for inflation, this gain actually represented a loss of $19 billion. And all of the real gains were realized households with incomes above $200,000. All other income classes suffered real losses yet still had to pay capital gains taxes.

The Joint Committee on Taxation did an analysis of corporate stock realizations in 1994. It found that the longer the stock had been held the greater the inflation component of the gains. On assets held for 16 years, inflation represented 112% of the realized gains.

The latest research on this issue was done by the Tax Foundation in 2006. It looked at a share of stock in a Standard and Poor's 500 index fund in 1956 and how much of the realized gain represented inflation each year through 2006. Over that period, the price level increased six times, so there was no real gain unless the nominal gain was greater than 600%.

Looking at the tax law in effect in each year, the Tax Foundation found that the effective capital gains tax rate on real gains greatly exceeded the statutory rate in every year. In some high inflation years the effective rate was greater than 100%.

For many years, economists have advocated indexing capital gains for inflation so that taxes would apply only to real gains. Both Robert Haig and Henry Simons, originators of the standard definition of income for tax purposes (commonly known as Haig-Simons), believed that capital gains taxes should apply only to real gains, not to those that simply represented inflation.

Kyl Kudos

Many thanks to Senator Jon Kyl (R-AZ) for making the case to President Obama at the White House fiscal summit for preserving the 2001 and 2003 tax cuts.

According to The Bureau of National Affairs Daily Tax Report:

Senate Republican Whip Jon Kyl (R-AZ) seized the opportunity to attack the president's intention to allow the expiration of some of the 2001 and 2003 tax cuts for wealthier households and businesses.

"The idea of raising taxes either on business or upper income earners...could have a very negative effect n economic growth and could either prevent [the] recovery or nip it in the bud," Kyl argued. "We are not out of the woods yet. We have to be very careful we don't kill this recovery we are trying to nurture along."

SPECIAL NOTE: Senate Republican Whip Jon Kyl will be addressing the next ACCF Capital Formation Forum next month!