Essay/Term paper: Eliminating the capital gains tax

Essay, term paper, research paper:  Social Issues

Eliminating The Capital Gains Tax


One of the major obstacles facing all entrepreneurs in the United States
when starting a new business or expanding an existing one is raising capital.
Here capital refers to money that people invest in a business. Investment and
entrepreneurship are the heart and soul of a lively economy. There is no other
economic task more important than investing one's capital into new ideas and new
enterprises. Therefore capital raised from one person or a group of
professional investors remains a crucial source of funding for these type of
enterprises. In the type of economic world which is present today the
opportunity for good returns on a person's money must be in abundance to allure
investments in such ventures. Capital gains taxes significantly diminish these
returns, therefore reducing the incentives to invest. Eliminating the capital
gains tax will spark entrepreneurship and new investments in the economy, which
in turn will elevate economic growth and increase the number of jobs. In order
to stimulate economic growth in the United States, taxes on capital gains should
be eliminated.
Members of Congress once considered a reduction in the capital gains tax
rate from 28% to 19.8%. Combined with indexation, which is
,
reducing the capital gains tax by any amount would be a vital pro-growth step
taken by Congress. However, given the fickle and high risk nature of
investments and entrepreneurships, and the importance of maintaining a
competitive economy in a global environment, capital gains should be exempt from
taxation altogether. A zero percent capital gains tax would attract
entrepreneurial risk taking, which is very important to economic growth. It
would entice wealthy investors to invest in a certain enterprise, which in small
numbers would immensely increase the economic growth in the United States. In
the Wall Street Journal the U.S. Commission on civil rights said, "Reducing the
tax on capital gains effectively increases the flow of financial 'seed corn' to
budding entrepreneurs." Also, from a global perspective, the United States has
one of the biggest capital gains tax rate. Depending on inflation, sometimes
the United States has the largest capital gains tax rate in the world. In a
competitive global economy a zero percent capital gains tax rate would make the
United States a haven for capital, which in the long run will spark economic
growth in the United States. Eliminating the capital gains tax altogether would
not only promote a "boom" economy in the United States but will give the United
States an edge that it needs to compete in the global world, not to mention
create new jobs.
The potential benefits for eliminating the capital gains tax are clear.
Venture capital investment was on the rise as the U.S. capital gains tax
declined up to 1986. This was followed by a dramatic downturn as the rate was
hiked 40% in 1987 (Venture Economics). Eliminating the capital gains tax would
augment the incentives to invest in new and expanding ventures. In a report from
the Small Business Survival Committee's July 1994 newsletter, economists Gary
and Aldona Robbins estimated the economic impact of eliminating the federal
capital gains tax. By the year 2000, the Robbins' projected that a zero percent
capital gains tax would lead to many new heights, some of which include: an
additional $3.2 trillion in capital formation, a creation of 1.1 million new
jobs, and extra $1.6 trillion in GDP to the year 2000, an annual GDP $391
billion higher than it would normally be, and additional 0.43 percentage points
on the long-term annual growth rate for the economy. It can be seen clearly by
the preceding that eliminating the capital gains tax would stimulate economic
growth in the United States like never before.
Proponents for a capital gains tax argue that a capital gains tax is
merely a tax on the wealthy and this particular tax will not affect the economy
too much. However, capital gains taxes are not only taxes on the wealthy but
they are taxes on wealth creation. As argued here the benefits of eliminating a
capital gains tax will be felt throughout the economy as economic growth
accelerates. By relating this to economic markets, it can be said that there
won't be any jobs without capital investments and entrepreneurs, and without
jobs the economy will be in a bust. In addition, capital gains tend to be
spread across a wider income spectrum than many believe. According to the IRS
Individual Income Tax Returns, Preliminary Data, 1992 federal income tax returns,
56% of returns claiming capital gains were from incomes of $50,000 or less,
including a capital gain. What this information boils down to is that the
capital gains tax affects almost everyone, which affects the economy in general.