Last week we discussed why a current proposal in Washington, D.C. to implement a so-called “Payroll Tax Holiday” is not a good form of Economic Stimulus. It seems only fair, having been critical of one concept, to present an alternative, given the wretched state of our current post-COVID-19 economy.
One worthy topic, previously mentioned by President Trump, is a proposal to cut the Capital Gains Tax. Capital Gains are realized when certain items are sold for more than the Seller paid for those same items. These include stocks and bonds, real estate, and several other categories. Capital Gains are taxed at varying rates, based on total taxable income of the taxpayer.
Van Wie Financial believes that Capital Gains Taxation needs at least two reforms. First, Capital Gains should carry a single, low, flat tax rate (preferably zero, but that is politically unrealistic). Low Capital Gains rates encourage needed economic activity. When Capital Gains rates were reduced in the 1990s by President Clinton, revenues to the government soared (as some economists predicted).
Another primary problem with our Capital Gains Tax system is taxing inflation. Many assets, especially real estate, are owned for a long period of time prior to selling. Depending on the holding period, some or all of the Capital Gain is due to simple inflation, and yet the Gain is taxed as if it were 100% profit. Indexing Capital Gains to inflation has been widely discussed, including in the current Administration, but it never sees the light of day because it is so easy to demagogue the issue as “favoring the rich.” In reality, many Middle-Class Americans also report Capital Gains and Capital Losses.
For extra measure, we could also propose a third change to taxation of Capital Gains and Capital Losses. Currently, all Capital Gains and Capital Losses within a single tax year offset each other. In addition, Losses in excess of Gains can be deducted from Gross Income, up to $3,000 annually. The $3,000 annual limit has been in effect since most people can remember, with (ironically) no adjustment for inflation over time. Van Wie Financial believes that the $3,000 limit should be repealed, allowing 100% of Capital Losses in excess of Capital Gains to reduce taxable income each year. We live in a risk-based economy, one in which tax policy can be used to stimulate economy activity.
We are at a period in time when Congress and the American People must be made to understand that our current approach to Economic Recovery is killing the patient. Spending our way to prosperity is not the answer, as it is impossible. De-taxing and de-regulating the Economy and the American People will regain the path to our recent, and not forgotten, prosperity.
Governments can print money, but they cannot print wealth.
Van Wie Financial is fee-only. For a reason.