Word: would
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Dates: during 1980-1989
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...more sermons about the evil 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...
...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 it without any special incentives...
Although they are now ostensibly taxed at the same rate as other income, capital gains already get favored treatment in two ways. First, they are only taxed when an investment is sold, unlike interest and dividends, which are taxed every year. An ideal free-market tax system would leave an investor indifferent between, say, a savings account paying 10% a year and a stock expected to rise 10% a year. But tax-free compounding means that, for a top- bracket taxpayer the after-tax profit on the stock will be 45% bigger after 20 years...
...interest -- an 8% return on a money-market fund at a time of 5% inflation is really only 3% -- but no one is proposing to do anything about that. Furthermore, no one is proposing to limit the deduction for interest paid. In a world with no taxes, it would not make sense to borrow at 10% for an investment that will pay only 8%. If the tax system adjusts profits for inflation but not borrowing costs, such a topsy-turvy investment can suddenly become a brilliant tax shelter. If you believe in the free market, that makes no sense...
...other factor makes capital gains different from other forms of income: you can generally choose when to take them. In a world with no 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...