capital gains

In today’s Wall Street Journal, Amity Schlaes notes that cuts in the capital gains tax were one of the key factors that paved the way for Steve Jobs and other innovators, and increased the flow of venture capital that created jobs and resulted in technological advances. (Schlaes recently wrote an interesting book about the economic history of the Depression, The Forgotten Man: A New History of the Great Depression.)

I wrote earlier about double standards contained in the capital gains tax, which result in it being higher and more burdensome than people commonly assume; and how it effectively punishes investors for investing during periods of inflation, since the government ignores inflation in calculating the cost of your investment. Moreover, while capital gains are taxable, capital losses often are excluded from consideration, and cannot be taken into account, in calculating your overall income for the year in which they occur; for example, you cannot list more than $3,000 in net capital losses on your tax return, but you have to list all of your net capital gains. That results in a “heads I win, tails you lose” situation in which the government effectively rips off investors. This encourages people to hold cash rather than invest in risky start-up enterprises that could create jobs, since it makes sense to hold cash rather than investing if you think you could lose money on a large scale due to either a depression or a jump in investor risk aversion that cuts the resale value of risky stock (for example, a shift by the investing public away from risky assets during a financial panic, or period of falling public confidence in the economy).

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