I've spoken earlier about the multiple excuses for the capital-gains loophole.
One of the most used is the claim that it leads to greater growth. In fact, the tax on capital gains has been the lowest level since WWII in recent years. From the trough of the 2001 recession until the peak before the meltdown, growth in real GDP was under the historic average -- an average over periods of both recession and recovery. Let me say that again:
The latest recovery was slower than growth across historic recession and recovery.
The right-wing defense of the capital-gains loophole is contradicted by experience. I'll point out a few of the holes in their theoretical argument after the jump.
In its simplest form, the right-wing argument for lower taxes on the rich, including the capital-gains loophole, goes like this:
If the government borrows $1 billion from the rich rather than taxing that $1 billion from the rich, the rich will have $1 billion more to invest in their companies.
That looks like reductio ad absurdum; but, really, the absurdity is in the original; the reduction merely shows it clearly.
Total production = consumption + private investment + government. If more resources are going to go into private investment, then either less resources have to go into consumption or less into government. Clearly, a lower tax on one sector of the public -- the rich -- will not affect the consumption of other sectors; almost as clearly, it will increase the consumption of that sector. By as much as it increases their consumption, it decreases investment.
In situations where investment goes into further production -- there are other situations where it increases inventory, decreases orders, and contributes to the downward spiral of the economy -- this decreases future production. At the same time, it increases the future cost of government interest.
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Another excuse, similar enough that it is often intertwined with the one above, is that the loophole for capital gains directs resources into better investments. Aside from the claim that government direction of investment decisions -- anathema to those propounding this excuse when government can make a choice -- magically becomes expedient when government officers are acting blindly, this argument dissolves when it is examined concretely.
Is the purchase of stocks which will grow in market value better for the national economy than the urchase of stocks which will pay a dividend? Not in any way! Even if the growth represents real progress, so does the dividend. Too often, the capital-gains loophole subsidizes the purchase of Enron instead of AT&T.