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Editorial: Capital gains tax ‚??cliff‚?? could send weak economy tumbling

History shows that reducing the capital gains tax serves to stimulate business investment and leads to higher capital gains tax collection for government. The Obama administration clings to the false belief that higher taxes will result in higher government revenues.

Unless something changes, Americans are going to be slammed with three large capital gains tax increases on Jan. 1, 2013, which could jump the top rate to 25 percent from the current 15 percent. That‚??s a whopping 67 percent increase that could trip up America‚??s limping economy.

The biggest increase would be 5 percentage points due to the expiration of the Bush tax cuts. These cuts, along with other Bush tax cuts such as those on incomes, have been extended twice before, at the end of 2010 and 2011. But President Barack Obama wants no more extensions.

The second cap gains increase is 3.8 percentage points, to fund¬†Obamacare. And the third is a 1.2 percentage-point increase called the ‚??Pease‚?Ě increase after its author, former high-tax Rep. Donald Pease (D-Ohio). Three capital gains tax increases on one day. Bam. Bam. Bam.

But if the government expects its projected revenue windfall of $50 billion to $70 billion from these increases to materialize, it should think again. A sharp increase in capital gains will be more likely to severely depress investment, damaging growth and with it tax collection.

‚??It‚??s going to hurt enough that they won‚??t raise any revenue, that‚??s for sure,‚?Ě Gary A. Robbins told us; he‚??s president of Fiscal Associates, an economic consulting firm in Alexandria,¬†Va. On Feb. 8, he submitted written testimony on tax policy before the Ways and Means Committee of the U.S. House of Representatives.

The capital gains tax increases, if implemented, by themselves would ‚??cut about $200 billion from U.S. GDP,‚?Ě he said. That‚??s because the tax increases would ‚??make people less willing to put money into a corporation. Instead, they‚??ll invest in something else, such as opportunities overseas.‚?Ě He added that a similar depressing effect also¬†will¬†be felt if the corporate dividends tax increase, scheduled to rise to 43.4 percent from 15 percent, also slams the economy on Jan. 1.

The lessons of history

History shows why raising the capital gains tax is foolish. When¬†the top rate was cut to 20 percent from 28 percent by President Reagan¬†in 1981, revenues actually rose to $18.7 billion in 1983 from $12.5 billion in 1980. That was a 50 percent jump. In 1986 Reagan agreed to an increase in that tax‚??one of his few mistakes‚??to 28 percent in 1987. That cut cap gains tax revenues to $24.9 billion in 1991 from $52.9 billion in 1986. (Fortunately, in 1986 Reagan also cut the top income tax rate to 28 percent from 50 percent; so, his economic recovery kept humming.)

In 1997, Republican House Speaker Newt Gingrich got President Bill Clinton to agree to cut the cap gains tax rate back to 21.2 percent from 29.2 percent. Yes, Democrats can cut taxes. That jumped cap gains tax receipts to $89.1 billion in 1998 from $66.4 billion in 1996. The cut put the zoom in the dot-com boom of that era.

President Bush further cut the cap gains rate in 2003 to 15 percent from 20 percent. Voila! Revenues from it soared to $74 billion in 2004 from $47 billion in 2002.

And it isn‚??t just the ‚??1 percent‚?Ě of rich folks who pay the capital gains tax. It‚??s almost anybody who invests. Worse, it‚??s the middle-class and the poor who suffer most when raising the tax kills investment in business and jobs creation.

It‚??s common sense. If you tax something, you get less of it. So if you tax higher investment in business and jobs creation, you get less of both. Unless Obama is replaced in January and these tax increases are repealed, we‚??ll endure four more years of economic stagnation‚??or worse.

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