John McCain says that he wants to "put government on your side and out of your way." However, his plan is only on the side of a few, gets in the way of small business and innovation and will most likely cause another asset bubble and get us in the same trouble all over again.
If McCain really understands his plan, then he wants to raise interest rates (and hence, the national debt), sell american companies and encourage speculation rather than investment.
I'm speaking specifically about his plan to cut capital gains taxes for the next 2 years. It is not pro-business, pro-investment or pro-innovation. It is basically welfare so certain kinds of businesses (especially big ones) have an advantage against others.
First, let's look at the obvious:
- Cutting the capital gains tax will benefit very few people right now because almost everybody's assets (stock portfolios and houses) are worth less.
- The only people who will benefit people now rich enough to still have appreciated assets and those who make money on transactions (i.e. stock brokers and real estate brokers). By contrast the tax moratorium on retirement accounts withdrawals does help those that are truly hurting.
- It will encourage tinvestment only in assets that are sold within two years, unless he really means to extend the cut indefinitely. So in this sense the policy is either completely stupid or completely dishonest. (I actually think it's both).
That's all pretty bad, but it gets worse. I'm making five claims here: Cutting the capital gains tax is anti-small business, will raise interest rates, raise the national debt, works against home owners and for asset bubbles.
Anti-small business: Let's assume you own a business and you need financing. You can either sell part of your business (i.e. equity) or take out a loan. If you borrow money, the lender pays tax on the interest recieved, but if you sell equity in your business the investor pays taxes on dividends (which Bush already cut) and capital gains if he sells his shares. Why should our govenment discriminate in favor of one form of investment over the other?
Moreover, most small business owners make money from running their business - this is no tax break for them. It does make it easier for big businesses to finance themselves so that they have an advantage over small businesses who don't have the same access to equity markets. Why should our government favor big businesses over small busnesses?
It raises interest rates: From the above example, it should be clear that a capital gains tax raises interest rates. If equity is taxed lower than debt, lenders will demand to be paid higher interest rates to make up for the tax loss.
It will raise the National Debt: Right now about 20% of our federal budget goes to interest on the national debt. If interest rates rise so do our interest payments and therefore so does the national debt.
Anti-Homeowner: Most people buy homes to live in them. A capital gains tax does nothing for them. It does encourage others to speculate on real estate though, which raises the value of homes and the cost to live in them.
Pro-Asset Bubble: Because capital gains taxes only kick in when you sell an asset, it encourages specualtion in assets rather than investing. That's how we got into this trouble in the first place.
Just to be clear, I'm not saying capital gains should be discriminated against, but why should they be given preference? Cutting captial gains taxes is basically the government telling us that income earned on selling assets is better than earning money in other ways. Is that a decision that government should be making for us?