Opinion - Taxes

Op-ed: Cutting the capital gains tax won't help people. It would only encourage investors to sell their winners

Key Points
  • Cutting capital gains taxes does little for the people who need the most help.
  • It would have no material benefit to the real economy, and it would encourage investors to sell their big winners to take advantage of what might be a temporary cut.
  • Already,  a $1.5 trillion-dollar tax cut that passed in late 2017 failed to boost capital investment, hiring or wages, as promised.

Would someone, anyone, explain to me the rationale for cutting capital gains taxes as a means to stimulate the Main Street economy?

Former White House Chief of Staff and Budget Director, Mick Mulvaney, once known as a fiscal hawk, reiterated his support on CNBC Wednesday, for a cut in capital gains taxes.

Capital gains are already taxed at preferential rates for investments held for longer than one year.

The current cap gains rate is 20%. But, with the retention of the so-called net investment income tax, the total federal capital gains tax could reach 23.8%.

In some cases, the sale of art, vintage cars or other more exotic assets, cap gains taxes reach 28%, but all long-term capital gains are taxed well below the highest statutory income tax rate of 37% on ordinary income.

There have been calls, as well, to index capital gains to inflation — FYI, they effectively already are, based on currently published income tax tables.

Given that the top 1% of the population owns the largest share of the nation's investment wealth, a cut in the cap gains rate would do nothing to reduce taxes or boost incomes for those most in need.

What we have seen from the various relief programs offered by the government in the coronavirus era is that enhanced unemployment benefits, $1,200 government grants and other support mechanisms have, indeed, helped those desperately in need of cash.

The stock market has done fine amid existing policies, while individuals have also benefited from transfer payments that have replaced lost income and boosted the national savings rate to record levels and that's a good thing.

The average individual investor, generally speaking, may own stocks, but most likely those are held in tax-deferred savings accounts like 401(k)s or IRAs.

A cap gains tax reduction would not affect the taxes on their current or future withdrawals.

In addition, the so-called "retail bros" who have taken to day-trading wouldn't benefit either, since market gains earned in less than one year's time are taxed as ordinary income. (Some of the most aggressive day traders may not realize that there is absolutely no preferential treatment for short-term stock market gains … just as an aside.)

More to the point, however, after such an enormous rebound rally on Wall Street, there could be a rather perverse effect on stock prices if there is a cap gains tax cut, or even just a so-called capital gains tax "holiday," as suggested by White House economic advisor, Larry Kudlow.

I would argue that, in addition to having no material benefit to the real economy, a reduction in capital gains taxes might just prompt investors to sell their big winners to take advantage of a window that may prove temporary at best.

The wider the differential between ordinary income and capital gains, the more likely you will see wealthy investors harvest profits, if the window is temporary, while they may just move money around from one asset to another, if the cuts are permanent.

Given that a $1.5 trillion-dollar tax cut that passed in late 2017 failed to boost capital investment, hiring or wages, as promised, it's quite specious to suggest that a further reduction in taxes on stock market gains will do anything but line the pockets of already wealthy investors.

Wealthy Americans, or those who have been able to retain gainful employment, health insurance and side hustles don't need the help.

Restaurants, brick-and-mortar retailers, movie theaters or sports venues will not see a rebound in attendance because wealthy investors pay less in capital gains taxes.

Middle-to-lower income individuals need more targeted relief, stimulus and health insurance guarantees, which enhances their purchasing power and would, in turn, help small, rather than large businesses.

Tax cuts, despite the claims of life-long supply-side economists, can be effective in stimulating the economy in some circumstances, but have often failed to produce the promised results and have frequently resulted in corporations solely buying back stock or raising dividends, as we have seen since 2018, not to mention burgeoning budget deficits.

Having said that, I also don't agree with Vice-President Biden that long-term capital gains taxes need to be raised to the level of ordinary income as that could dampen investors' willingness to support capital-raising enterprises, entrepreneurship and much-needed innovation.

Still, and again, this administration appears to want to waste its fiscal firepower on the rich and not support those who have been most hard-hit by the coronavirus, the economic lockdown and lost wages.

It's potentially a lost opportunity for the "average American" to make some gains in the effort to move the economy up, and out, of a very deep hole.