Consolidating from another thread.
Raising the capital gains tax doesn't necessarily reduce the pool of investment dollars unless you get to the point where people decide not to invest at all. I don't think we are close to that point at all. People might grumble, but they would still rather see the possibility of 10% return taxed at 25% versus plunking the money in a savings account with .04% return.
That's true. I definitely don't see people pulling out of the market because the tax rate goes up slightly. But, each time they actualize earnings, they'll lose a bit more of the earnings to taxes. So, say I invest $100 today and double it. With today's 15% rate, I would have $185 to invest tomorrow, whereas with a 30% rate I would only have $170 to invest tomorrow.
That's true... but you've also selected a very unusual period in our nation's economy. Everyone saw the internet and knew it would drastically affect how businesses interacted with each other and consumers. Investors knew wealth would be created practically out of thin air. That's why investing was so speculative - people had high hopes of returns and there was nothing like this in the past from which to ground expectations or make comparisons. Natural optimism overtook good sense.
Yeah, no doubt. That definitely exagerated the effect.
At some point though, more investment dollars don't drive bloated prices even higher. The market resists that and instead shifts the added capital to other companies. Companies that wouldn't have received the needed capital now have that opportunity... which leads to additional jobs, factories, widgets, and growth. The pool of companies is not limited and investment dollars are not bound to a few companies. Although this isn't exactly the same, we saw in the early part of this year what happens when the wheels of our economy are not properly greased with enough capital - the entire thing grinds to a halt.
But if we keep spawning more widgets and companies, but we don't have enough consumer spending to buy that stuff, it's all for naught. The house of cards eventually crashes back down to earth. Early this year the problem wasn't that not enough investment capital was available, the problem was that that capital withdrew from the market because the actual profits of those companies couldn't support it.
I'm maybe overly aware of this side of things because I live in the bay area and work in tech... But let me just say- most those new companies being created by investors that were desperate to find something, anything, to invest in at a reasonable price, were bad companies. I've had friends who basically just threw together a vague powerpoint with lots of bright arrows and buzzwords, went around to various venture capitalists, and got millions of dollars of investments without even really having any idea of what they were going to do with it. Needless to say, that didn't turn out well for anybody...
I think we have plenty of investment capital at the moment, but the actual people of the US have actually been seeing their real income drop for almost a decade and that is causing problems.
Why? Why not let the market find its own equilibrium? Why should we impose restrictions and influences on the economy that will certainly have unintended effects?
Yeah, I agree. I was saying "if you wanted to muck with the dials, here is what you would do". What I'm actually proposing is setting them at equal and not mucking with it anymore.
If, according to you, we have too much investment capital in gold and t-bills, how will raising the capital gains tax help at all? I can see the point of lowering the income tax to increase consumption. However, note that increasing consumption will increase the demand for production. When the demand for production increases, the demand for capital to fund expansionary practices increases as well, which should affect the glut of capital.
I think that's what the big investment houses are waiting for before reinvesting that capital. They want to see demand rise first.
I tend to agree, though I think that government spending should be reduced to the point where it is possible to have relatively low capital gains and income taxes across the board.
I agree that we need to cut spending, but I might disagree about what kind of spending to cut most heavily. I think there is some just generic waste and unneccesary domestic programs and whatnot and we should cut those. But, the big ticket item is the military budget. Without cutting that, dramatically, we won't really see the spending equation come back into balance. I favor making a plan to get us out of Iraq and Afganistan as soon as we can without leaving them in total devestation, then cutting the military dramatically, and using those savings to cover the deficit, then pay down the debt, then once that's done, to lower taxes.
