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Why Not Eliminate the Cap-Gains Tax for Everyone?

The Case-Shiller home-price index increased yesterday for the third month in a row. That’s terrific news. After a 40 to 50 percent drop in home prices in recent years, sales are picking up, because prices are way down. That’s also great. Markets work.

But here’s what I don’t like about this story: Big, central-planning, government-directed tax preferences for housing, like the $8,000 dollar tax credit for new buyers. Or even the popular mortgage interest deduction. And let’s not forget perhaps the biggest one of all: Home sales are basically capital-gains-tax free. That passed back in 1997. Many people (including myself) believe it helped create the bubble.

Why not eliminate the capital-gains tax for everyone and all sectors, including investors and stocks and bonds? Why direct it only to housing? Let’s abolish the capital-gains tax altogether. Let’s quit double-taxing investment, which is what capital gains does. But let’s do it for everyone and everything — not just housing. While we’re giving all these preferences to housing, what about manufacturing? What about transportation? Or health care? Or any other sector in the economy for that matter?

We also could be cutting business tax rates across-the-board for companies big and small.

And for all individuals and businesses, why not a simple, low, flat-rate tax? Somewhere between 15 and 20 percent? Get rid of all of the special preferences and deductions in the code. Stop favoring one sector at the expense of the others. Incidentally, this would stop the corruption of K-Street lobbyists who love to get these preferences in there.

Let’s make the tax code simple, fair, and pro-growth, to unleash prosperity. Let’s stop the political direction of the economy, and let’s substitute a market direction of the economy. A true flat tax would do it.

If you get to keep more of what you earn and invest at the lower tax rate — if you tax something less — you’ll get more of it. If you tax the whole economy less — not just housing, but the entire economy — you will get a much more prosperous and healthier economy. At a time when we’re all worried about economic growth, we ought to be thinking hard about this.

Questions? Comments, send your emails to: lkudlow@kudlow.com