Capital Gains Logic Explained Short & Sweet

Posted: August 8, 2008 in Technology and Business
Financial writer James Altucher is a pretty smart market cookie.  He recently wrote one of the best explanations I’ve heard for why cutting capital gains taxes is bad.  Click here for the full piece.  Below are the interesting outtakes.
 
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The idea behind raising the taxes [Capital Gains] is that this primarily effects the wealthy and does not affect middle-income or lower-income people.

This is a not a Democrat vs. Republican issue. In fact, the largest increase in capital gains occurred when Richard Nixon [R] became president in 1969 and raised the tax from 28% to 49%. What happened then? It effectively eliminated the revenue that the government collected from the capital gains taxes, because there was a negative incentive to sell shares.

When there is negative incentive to sell, not only is less revenue raised by the government but there is less money reallocated from older business to new, entrepreneurial ventures. The market and the economy began to slide in the early ’70s, creating the worst bear market since World War II…

 
 
Congress finally slashed the Nixon capital gains raises in 1978 (under Carter), giving rise to the venture capital boom that spurred on Silicon Valley all through the ’80s and ’90s. Anybody who thinks an increase in capital gains taxes will result in more government revenue only need look at the ’70s as a prime example of the reverse.
 
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