Monday, October 27, 2008

If you Want Economic Recovery, Eliminate The Capital Gains Tax On Profits From Monies Used To Purchase New Plant And Equipment And To Create New Jobs.

October 27, 2008

Re: If you Want Economic Recovery, Eliminate The Capital Gains Tax On Profits From Monies Used To Purchase New Plant And Equipment And To Create New Jobs.


Having spent the last two weeks in Prague, Germany and Luxembourg, this writer can attest that one is never really out of touch if one doesn’t wish to be. USA Today, the International Herald Tribune, the European edition of the Wall Street Journal and CNN are everywhere, not to mention the BBC. So it was possible -- though the polar opposite of delightful -- to watch the further economic meltdown arising from the loss of moral principles inculcated decades ago in the Midwest shortly after World War II. Good faith, honesty, diligent long range thought, competence, concern for others continue to be on holiday, just as they were when the ARMs, other subprimes, derivatives, 1.7 billion annual paydays for fund managers, Reaganesque (and Republican) induced greed, ever increasing income disparity, ever increasing deregulation, destruction of Glass-Steagall, Greenspanish/Ayn Randish laxity, Greenspanish efforts to cover up one burst bubble by inducing another bubble, were in high carnival. The attempts at financial cure by one of disaster’s architects, Paulson, have thus far proven to be further ineptitude born of poor thought and panic: the 700 billion dollar bailout is to date a failure that only rescues big business, banks still are not lending though they now are fabulously enriched by government money, huge companies that collapse (though for decades we were assured that in hugeness lies salvation) are being merged so that they will be yet bigger (and next time can take down the universe), small businesses are collapsing, some huge corporations seem on the verge, the stock market has dropped like a rock, retirement monies have been rendered financially quadriplegic, people are losing jobs by the scores or hundreds of thousands, homeowners are losing their homes by the scores or hundreds of thousands, to put icing on the cake one read that a high official of Goldman Sachs -- Paulson’s old firm, which sold the trash by the gazillions but was one of the few banks not stupid enough to own the trash itself -- was somehow present at high level discussions of what to do about AIG, whose collapse, if I have it right, might have caused the collapse of Goldman too because Goldman owned so much AIG debt, nations abroad have caught America’s pneumonia, and the ruling establishment of this country, including the sainted disciple of the fool Ayn Rand, Alan Greenspan, has yet again shown itself stupid, greedy, uncaring of others, dishonest, dismissive of facts, and, many of them, worthy only of being put against the wall -- after a fair trial, of course, and only metaphorically, of course -- for smashing up the lives of tens or scores of millions.

Yes, a lot happened while the author was in Europe, and one hardly knows what to say. Plainly events are in the saddle and ride mankind.

In the midst of the disaster, please allow this writer to make two small suggestions, one standard (and alluded to here previously), the other unique as far as I know. The first requisite of economic recovery is emphatically not to give billions to the swine who brought disaster upon us and who currently simply hoard what they are given -- hoard it against a rainy day when we are already at sea in a typhoon. Rather, the first requisite of economic recovery is to give money to those who will have to spend it because they are in need. They have lost their jobs, their homes, sometimes their cars, their food may be dwindling. They will spend the money, not hoard it, and their expenditures will help revival. And while you’re at it, by the way, lower all interest rates to some reasonable amount like 6 or 7 or 8 percent: lower the rates both of those who have lost or may lose their homes, and those who have managed to bear up under the burden; reinstall usury laws, which were knocked out defacto by the Supreme Court 30 years ago using the arguments of a brilliant lawyer who did evil (you might be surprised -- or not -- at who it was and later made clear to me that he was proud of it); and if banks and security holders scream and yell and shout the constitutional strictures about obligations of contracts, well, eff the greedy bastards. Congress and states, it has been ruled, can change the obligations of contracts when escaping societal disaster makes this desirable, and, anyway, even the greedy emmeffers will be financially better off if people can pay their mortgages than if the disaster continues.

Now the unique idea, one that will cause persons who stupidly call me socialistic to run screaming to the loony bin -- where they should be -- because the idea is so capitalistic in nature. Eliminate -- or at minimum, drastically reduce -- the capital gains tax for equity investments used for the purpose of purchasing new plant and equipment or of creating new jobs. Maybe also lower, perhaps drastically lower (even eliminate?) the tax on loans used for these purposes. But tax at ordinary income rates the gains on equity investments used to buy stocks that are already trading, and tax at reasonable rates, though perhaps at less than ordinary income tax rates, the gains on used houses, i.e., houses that have already been purchased a first time.

However, one works out the details, eliminating or greatly reducing the capital gains tax on monies investors use to provide equity for new plant, equipment or jobs will result in a vast redirection of funds that presently go into the unproductive greed machine called the stock market. The idea here is not terribly different, after all, from the idea behind venture capital funds. People will invest in (and lenders will loan for) productive uses, instead of the effing stock market, because of the vast tax break on capital gains and because stock market profits will be taxed at a near ordinary income rates. Money mangers and funds will spring up to investigate, make recommendations for, and run money for purposes of investment in new plant, equipment and jobs (just as venture capitalists already do for the wealthy). Retirement monies could be invested (or loaned) so that they not only earn money tax free before retirement, but afterwards will be tax free (or have much lower taxes) when people take them out and use them during retirement. Monies could be invested abroad -- even in third world countries -- to be used for new plant, equipment and jobs.
One knows, of course, that the small minded, the tax experts, the tax lawyers, the already rich who want to keep their monopoly on venture capital profits will find a thousand reasons to object to this. They’ll say -- although it is complete bullshit -- that you won’t know what monies are being used for the appropriate purposes and which for other purposes. Baloney: monies will be raised and used for specific purposes just as venture capitalists do, and any commingling merely presents an accounting problem that is less than kindergarten play for today’s computers. They’ll say there won’t be enough demand for all the monies people will want to invest. This is baloney because, when you open up investments to this tax treatment -- and especially if you open foreign investments to it -- the sky may be the limit. They’ll say people will be risking loss of their retirement nest eggs (like George Bush would have had them lose their social security by investing in the stock market). This too is baloney. What do they call what’s already happened to people whose retirement funds have been smashed? What’s more, in the overall, good venture capitalists make a fortune on balance even if they lose money on some particular investments. Moreover, like today’s venture capitalists, the investment funds which spring up to accommodate the investment monies can provide advice to and can engage in monitoring new businesses where necessary. And anyone who does not want to take the risk can continue investing, as they do now, in the stock market, in debt instruments (CDs, Treasuries, etc.).
Opponents will also ask if the new tax treatment should be applicable to corporations that spend monies for new plant and equipment. Of course it should: for scores of years we have already had tax breaks (e.gs., accelerated depreciation, tax credits) for investment in new plant and equipment. And determining the profits attributable (or at least reasonable estimates of the profits attributable) to the new plant, equipment and workers, is simply a matter of cost accounting. How difficult can it be to make reasonable estimates with today’s computers?
The bottom line is this: the already privileged, and the sticks in the mud, will find a thousand alleged objections. Nonetheless, if you want the economy to revive, then quickly eliminate or greatly reduce the capital gains tax on profits from monies invested for new plant, equipment and jobs, and increase the capital gains tax profits from monies used in the wasteful pursuits of trading securities and other things.*


*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

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