Is Treasury Secretary Mnuchin’s Move to Reduce Capital Gains Taxes Naive or Genius?

When I heard the news yesterday, I nearly fell off my chair, not because it’s a bad idea, but the timing in my humble opinion could not be worse. The Treasury Secretary is studying the ramifications of reducing capital gains taxes on investments like stocks, bonds and real estate, by taking into account inflation before levying taxes on investors selling those assets. Capital gains currently are figured by subtracting original asset purchase prices from current sale prices without adjusting for inflation. Obviously, such a move would be seen as favoring the rich who have more assets to sell and would thereby benefit most from such a proposal. In addition, at least in the short run, naysayers contend that the move would further increase our already obscene and growing Government debt, which nobody thinks is a good idea. However, proponents of the proposal would argue that reducing capital gains would in the medium to longer term increase economic activity and ultimately lead to an increase in tax collections by the Government.

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Notwithstanding the economic merits of such a proposal, the politics of doing this and doing it now seem to be ill-advised. The Democrats already depict this administration as favoring the rich, there’s all the noise about Russia, world trade and tariffs, immigration, not to mention there’s a midterm election coming in a few months. Why would the GOP propose something like this, that is likely to inflame the media and has NO chance of happening any time soon? It would seem like a bone-headed move, right?

Or perhaps it’s a stroke of pure genius. Stock market followers sensing pending doom in the markets for months may now believe that the recent tanking of market stalwarts like Netflix and Facebook is signaling the imminence of a market correction. If history is any guide, August is a good time for a stock market sell-off. The GOP knows that the only hope of sustaining the heady economic growth recently reported (and give them a fighting chance in the midterm elections) is to delay a stock market sell-off until at least next year. What better way to keep folks from selling their stocks now, but by holding out even the possibility that if they wait until next year, their tax bills will be lower? The genius part of the move is that such a “bluff,” if you will, won’t cost taxpayers a dime and isn’t that a better idea than spending trillions propping up the market by getting the Fed to lower interest rates, print money or restarting quantitative easing again?

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