China's Capital Gains Tax Rate Is What?

Recently Larry Kudlow leaped atop his ever-present soapbox to proclaim the great irony that "communist" China does not tax capital gains. That's right: China's capital gains tax rate is zero. Evidently, in "communist" China, the concept that you can keep whatever profit you can manage from a transaction (and suffer alone the consequence of a loss) does not violate or contradict "communist" theology. See contra, of course, former Democrat House Leader Richard Gephardt, who, during the Clinton administration (if memory serves), pronounced that lower capital gains rates were "anathema to Democratic Party theology"(emphsis added). There is a reason why I this was "seared" in my memory.

The capital gains tax, very simply, is a tax on capital formation, and therefore on job creation and innovation. It has little to no usefulness as a tool of economic policy or revenue generation. It is nothing but a political football. Many modern economies, in addition to China, simply don't tax capital gains. The benefits derived from what little revenue generation occurs are too easily outweighed by the destructive impact on the general economy. I will maintain over and again that a big part of the reason why we're in the mess we are is because once the Dems regained control of Congress in November, 2006, everyone knew low capital gains rates were in jeopardy, and that any hope for help on the tax front which would ameliorate the collapse of the housing bubble (largely created by Democrats in Washington) had vanished.

What prompts me to write this, however, is the appearance of Congressman John Campbell (R, Irvine), on Hugh Hewitt's show yesterday. He is going to propose a capital gains holiday for any capital investment made during 2009 and held for at least twelve months. I think this is brilliant. Rep. Campbell credited a constituent who just sent him an e-mail with the idea. I also think it has the proverbial snowball's chance in hell, sadly.

I think the Campbell proposal is brilliant because it directly addresses significant problems in the economy which are impeding growth and job creation. Specifically, it addresses the biggest problem facing us today (economy-wise) apart from toxic assets. That problem is appetite for risk. Velocity dried up last fall because there was no appetite for risk on the part of businesses, investors, consumers, or whomever. This was clearly evidenced by the 0.01% rates that obtained with respect to both the one month and three month treasury bills - in short, there was money out there, but it was parked in short-term securities. (Today, the rates are 0.11% and 0.19%, respectively.)

If investors know that they can add a minimum of 15% to their profit projections, and more likely at least 20%, by virtue of federal capital gains taxes being waived, do you think that might spark a wave of investment in capital assets which, by the way, are way down in price? That would really solve the velocity issue. And it would probably spark the creation of new businesses and employment. Capital markets would be markedly buoyed, and balance sheets would start looking much better. There would be a wave of activity, in 2009, that would provide a near-magical boost to 2009 GDP.

And, here's the really great part. There would be little to zero static reduction in capital gains tax revenue for at least twelve months, because many of these assets would not have been purchased and sold within that time frame absent the holiday. Moreover, from a dynamic standpoint, it is likely that the boost to GDP growth would generate increased revenues from other tax sources (e.g., income taxes, etc.). Any theoretical loss of revenue in the out-years would, according to the President's budget projections, occur when the economy surely will be booming and generating all sorts of revenue from other sources.

This is such a winner of an idea, the only thing that could hold it back is something like... theology. Only religious fanatics would not see the merit in this proposal - provided their concern is actually in improving the economy. Unfortunately, religious fanatics are in control, and the religion is what is very misnamed as "liberalism". I'm sure I've said it before, but "liberal" is the pre-eminent Orwellism of our time.

Liberals aren't. They've got a whole scheme of theological canons they adhere to, which are impervious to reason, and taxing capital is at the top of the list. No matter what the data show regarding manipulation of the capital gains tax rate (such as increases in revenue when rates are reduced), all these campus radicals want to do is tax capital more, because capital gains are bad. The "communists" in China have got around to deciding that this "thinking" is madness, but the campus radicals chic-ing around the Supreme Soviet in Washington love it. Ronald Reagan is rolling over in his grave because the world is upside down.