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Capital Ideas
Liberty's Torch ^ | April 14, 2012 | Francis W. Porretto

Posted on 04/14/2012 5:40:56 AM PDT by fporretto

In the ongoing presidential campaign, we may expect a handful of broad themes to receive the overwhelmingly greater fraction of the Democrat propagandists' efforts:

The "fairness" canard is, of course, aimed at cowing the GOP's Congressional caucus, its candidates, and the electorate into bowing to higher taxation. In this connection, the Democrats' dominant meme has been that "millionaires and billionaires" are somehow evading paying their "fair share" of federal taxes, and that this contributes to the immense Obamunist deficit.

Let's see if I can make this as striking as it always was at Eternity Road:


Anyone who's been even half awake as the political arrows have flown past must surely know by now that the top 1% of taxpayers pay about 40% of all income taxes, while 47% of American households pay no federal tax at all. Please be aware that capital gains taxes, a particular favorite of the Democrats, are included in "income taxes."

If one one-hundredth of our populace paying two-fifths of our national bills is "unfair," then I ask you: to whom?

Isn't it time we asked that question of the Democrats explicitly, and with maximum scorn?

* * *

Capital-gains accounting has a somewhat unfamiliar flavor to many Americans, even though, as matters stand, more than half of us will have to grapple with its effects at some time in the future, either personally or through a paid tax preparer.

Broadly speaking, anything you, Gentle Reader, acquire in the hopes that its value will appreciate is considered capital. The difference between what you paid for it and what you sell it for is defined as "capital gain." Here's the Infernal Internal Revenue Racket Service's statement on the subject:

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss.

Currently, for a middle-class taxpayer who has bought an asset -- usually, stocks, bonds, or other investment vehicles -- and has retained it for two years or more, the tax rate on his gain when he sells it is 15%. If he's fortunate enough to have owned a second home, or any other real estate other than his primary residence, the same rule applies.

If you have any investment vehicles other than in the unique form of a 401(k) account, capital-gains taxation will eventually matter to you. The rate at which your gains will be taxed will matter to you...possibly quite a lot. But as important as it might be to you personally, it will be far more important to the American economy. The reason can be summed up in a single word:


The higher the capital-gains tax rate, the more reluctant are those who hold a significant amount of capital to sell it, or any portion of it. When an economy is in the doldrums, as is that of the United States at this time, that reluctance to sell and be hit with cap-gains taxes tends to "freeze" investments wherever they happen to be. In the terms favored by financial analysts, high cap-gains taxes decrease the liquidity of American capital holdings overall.

But an economy in recession needs for capital to get into motion: in particular, away from investments that have proved faulty and toward new, promising opportunities. To the extent that capital is rendered "sluggish" by high cap-gains tax rates, that process is retarded, and the recession is prolonged.

Barack Hussein Obama and his Fairness Chorus are aiming at the current cap-gains tax rate. They want to raise it, as sharply as politically possible. A high cap-gains rate wouldn't bring in a lot of additional federal revenue, even in the short term, but it would improve the regime's negotiating position vis-a-vis those corporations and investment institutions that would like to become its favored cronies -- to say nothing of the galvanizing effect such a move would have on the left-wing base of the Democrat Party.

So when you hear Obama prattling about "fairness," you should translate it to "class warfare," "crony capitalism," and "Occupy Wall Street."

* * *

You haven't seen the worst of it yet. I have yet to describe what happens when the effects of government inflation are included.

Whenever the Federal Reserve Bank increases the supply of currency and credit -- for example, by purchasing Treasury bills -- the value of every dollar in the economy is reduced in proportion. Over time, that will cause an increase in the overall price level of everything. You will pay more tomorrow for the items you purchase today, regardless of what they are. That effect will also apply to investment vehicles such as stocks and bonds, even if the volume of trade in them is very low.

An example will help to clarify this. Suppose Smith purchases 100 shares of XYZ Corp. at $10 each, today in 2012. Net price: $1000. Imagine that by 2022, the steady inflation of the dollar has expanded the volume of currency and credit to twice what it was at Smith's time of purchase. Were Smith to sell his XYZ Corp. holdings at $20 per share, the $2000 he receives would purchase no more, in consumer goods and services, than it would have in 2012. Yet the IRS would claim that Smith has realized a capital gain of $1000, and would demand a tax on it.

The destruction of the dollar by government inflation -- currently, the Federal Reserve Bank purchases over 60% of new federal debt, using money created out of thin air -- is ongoing and severe. It hasn't yet made its power completely visible, owing to the large cash balances being held by major corporations and institutions reluctant to invest in today's political and economic climate. But it will; there's no surer proposition in all of economics.

Inflation has crippled many nations throughout history: Weimar Germany, Revolutionary France, and Chiang Kai-shek's China are only the most dramatic cases. Combining high inflation with high cap-gains tax rates is a death blow even to a healthy economy -- and ours is already on the ropes.

* * *

All of this is okay with the Obamunists. They want to retain the White House and as many seats in Congress as they can; if that requires crippling the economy, guaranteeing protracted unemployment for millions of Americans, and endangering the retirements of millions of others, so be it. More, as I mentioned above, high cap-gains tax rates give them a lever to use against corporations and investment houses that won't do their bidding. So they play the class-warfare game, rant about "fairness," and intimate over and over that for Smith to do well, particularly with his investments, somehow forces Jones to do poorly.

Spread it around, particularly among your "fairness-minded" friends.

TOPICS: Business/Economy; Government; Politics
KEYWORDS: capitalgains; fairness; inflation
Fool us once (Carter), shame on us. Fool us twice...?
1 posted on 04/14/2012 5:41:04 AM PDT by fporretto
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To: fporretto
Very well explained, thank you.

There are far too many Americans whose eyes glaze over when words such as "inflation" or "capital gains" come into the conversation --they think it's beyond their understanding and that it somehow doesn't affect them on a personal level.

It's much easier to talk of "fairness" and "tax the rich" --anything that puts the onus on the other guy.

2 posted on 04/14/2012 6:58:35 AM PDT by Mygirlsmom ("Your money or your life" has been the Dems unwritten motto for a long time)
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