Word: breaking
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Dates: during 1980-1989
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...effects of high tax rates. But there is a second, equally important feature. Tax rates should be the same on alternative forms of economic activity. If plumbers are taxed more than electricians, there will be fewer plumbers and more electricians than the free market would dictate. If a tax break goes to timber but not to steel, investment flows out of the steel industry and into the timber industry. In either case, the Government is overriding the free market and dictating the shape of the economy just as surely as if it did so directly. Except that doing so directly...
There is nothing magical or unique about capital gains. A special break for this particular form of investment profit distorts the free market in two ways. First, it prejudices the economy in favor of certain kinds of investment. Those who say we need to encourage entrepreneurs or long-term investors with this break (which actually would reserve few of its benefits for those charmed circles) are saying the Government can outguess the market about which investments will pay off. If a risky or long-term investment makes more sense than keeping money in a savings account, the market will reward...
Second, billions of dollars (not to mention vast reservoirs of human ingenuity) can be wasted turning disfavored forms of income into favored forms. The essential function of the tax-shelter industry was converting ordinary income into capital gains, before the gains break was eliminated in the 1986 tax reform...
...taxes, an investor would trade one investment for another whenever he or she thought the new one would be more profitable. In the real world, people hold on to investments they would otherwise trade in order to avoid paying the tax. That makes the economy less efficient. A tax break for capital gains would reduce this so-called lock-in effect. (Although, please note, this is exactly the opposite of one argument usually heard for a capital-gains break -- that we need to encourage long-term investment.) What would reduce the lock-in effect even more, however -- without adding...
From a free-market perspective, then, there is no justification for a special tax break for capital gains. If advocates of a capital-gains break wish to concede that they are socialists engaged in large-scale Government intervention in the economy, we can start again from the top on that basis. Of course, if we're talking socialism, it will be a lot harder to avoid the fairness issue...