The Greedy Hand Of Government

The new capital gains tax and ‘the greedy hand of government’

“If you take a $1 bill and double it each year, after 20 years, it will compound to a total of $1 million dollars. But if you take the same $1 bill, double it each year and then subtract 35 percent in taxes, after 20 years it will have generated only about $24,000.” — Malcolm Forbes

In 1913 Uncle Sam collected only about $13 million in income taxes. That’s why they were call the “good old days.” Taxes, of course, have gone up considerably since 1913, and every April 15 is now known as the day the government says, “Stick ’em up.”

President Obama said in his State of Union Message that he wants to raise taxes, particularly capital gains taxes, through what Thomas Paine called “the greedy hand of government.”

In an interview with Charlie Gibson, President Obama said, “I look at raising the capital gains tax for purposes of fairness.” Gibson pointed out that when the capital gains tax was reduced under Presidents Bill Clinton and George W. Bush, the government took in more money from the tax. Nonetheless, the president maintains it not fair to have a lower tax rate for some, and proposed to raise it to nearly double the rate when he entered office.

What is not fair is any capital gains tax. It should be zero, as many economists advocate. Several countries have no capital gains tax, including Austria, Belgium, Germany, Greece, Luxembourg, Mexico, New Zealand, Portugal and Turkey. More than a dozen additional countries do not tax gains on stocks.

What’s truly not fair is the top 3 percent of income earners pay more personal income tax than the other 97 percent, according to a Wall Street Journal editorial.

From the founding of the country until 1921, the United States did not tax capital, with a brief exception during the Civil War. In Gray v. Darlington, the U.S. Supreme Court ruled that capital gains are not income, as did several subsequent rulings up until 1921.

Taxing both the income stream from a capital asset, and the value of the underlying asset, is taxing the same income twice. With the adoption of the 16th Amendment in 1913, “the greedy hand of government” defined capital gains as income. In 1921, in Merchants Loan and Trust v. Smietanka, the court agreed.

The eminent economist Ludwig von Mises said, “There are no means by which the general standard of living can be raised other than by accelerating the increase of capital as compared with population.”

It seems self-evident: Workers earn more when there is more capital (profits invested), which should be common sense. Workers with lots of machines, technology and equipment will produce more per hour than workers who don’t have access to capital.

Obviously, a man with a D8 tractor is more productive than a dozen men with shovels, a chainsaw than a handsaw, a spray gun than a paintbrush (all tools provided via profits, savings or investments).

My corporation bought a rental house 30 years ago for $135,000. It’s now worth $635,000, for a $500,000 capital gain. However, unless I can buy another similar house for $135,000, there is no gain, only a phantom profit.

If I sell and pay the capital gains tax of $140,000, it is a $140,000 tax on government-created inflation, inflation created through the Federal Reserve. If I sell, I’m worse off because I cannot buy a similar replacement rental house. My primary “benefit” is not profit, but the forced savings by owning the house for 30 years (while paying an income tax yearly on the rental income plus a property tax).

Multiply this by millions of taxpayers locked in and acknowledge the economy is stunted when there is less “capital compared with population” to invest in machines, technology, tools, factories and equipment (new or replacement), resulting in fewer jobs and lower wages than if there were no capital gains tax.

Government is not a “necessary evil,” as claimed by Thomas Paine. Government is indispensable for protection against foreign and domestic predators, protection of private property and to invoke a common system of justice — when government is properly limited in its ability to tax and regulate.

Capital gains taxes should be abolished if you want to raise real wages and grow the economy. If you want to cut off your nose to spite your face, redistribute wealth, stagnate the economy and have everyone poorer “in fairness,”  then you have the makings of a politician motivated by begrudgery, greed, revenge, envy and covetousness.