Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

10
Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexation

VICTOR A. CANTO AND ARTHUR B. LAFFER

A capital gains tax rate cut from the current 28 percent to 15 percent without indexing should be preferred over pure indexing if the real return on the investment exceeded the rate of inflation. With inflation higher than the real return, the preference would be for indexing. At a 20 percent capital gains tax rate, the breakpoint occurs when inflation is 40 percent the size of the real yield.

This explains why people who are after "the big kill" prefer almost any rate reduction over indexing. But we should never let the best become the enemy of the good. Our view is that, on balance, we'll get more of a capital gains tax reduction with indexing than we could ever realistically get with a rate reduction. Future congresses would be far more likely to raise rates back up again than they would be to remove indexing. As a final point, it also seems likely to us that an indexing proposal would have broader coverage than would rate reduction. 1

Whatever happens, be it rate reduction, indexing, or some combination, we all will be a lot better off. The logic underpinning any tax whatsoever on capital gains is flawed to the core. In spite of Herb Stein's exalted forum on the editorial page of the Wall Street Journal, his analogy between a basketball player earning a cool million and an entrepreneur's capital gain of a million is wrong. 2 They are not equivalent events. Capital gains is not income nor is the value of an asset income. Treating changes in the value of an asset as income is sparkle-headed. If income is to be taxed, then capital gains should not be taxed. A government can choose to tax either the value of an asset or its yield, but it should not tax both! That is double taxation.

-147-

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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