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Evaluating a Cut in Capital Gains Taxes

March 18, 1990

In discussions about using a capital gains tax break to encourage investment in our nation's economy, we are missing an evaluation of where the incentives would actually fall.

A capital gains tax break does not reward the person who invests. Instead, it rewards the person who liquidates an investment. However, the reward would also benefit the person who uses those funds to buy a car, vacation or other consumer item. Continued investing is not encouraged.

Worse, a capital gains tax break only benefits the person who has already reaped the reward of a profit on an investment. It penalizes the person who suffers a loss by reducing the deductibility of that loss. Thus, a capital gains tax break encourages safe investments while discouraging the risk capital that is most needed by our economy.

Compare these negative features of a capital gains tax break with the tax break for an individual retirement account. With an IRA, the reward is realized immediately when the investment is made, not when it is liquidated. Also, an IRA is an incentive to reinvest funds from a liquidated investment and not to consume those funds. Finally, the IRA tax break promotes long-term investments, reducing the destructive attention to short-term performance that neglects durable economic strength.

DAVID E. ROSS

Agoura

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