Cut the Capital Gains Tax and Government Spending to Create Jobs and Promote Technological Advances

In today’s Wall Street Journal, Amity Schlaes notes that cuts in the capital gains tax were one of the key factors that paved the way for Steve Jobs and other innovators, and increased the flow of venture capital that created jobs and resulted in technological advances. (Schlaes recently wrote an interesting book about the economic history of the Depression, The Forgotten Man: A New History of the Great Depression.)

I wrote earlier about double standards contained in the capital gains tax, which result in it being higher and more burdensome than people commonly assume; and how it effectively punishes investors for investing during periods of inflation, since the government ignores inflation in calculating the cost of your investment. Moreover, while capital gains are taxable, capital losses often are excluded from consideration, and cannot be taken into account, in calculating your overall income for the year in which they occur; for example, you cannot list more than $3,000 in net capital losses on your tax return, but you have to list all of your net capital gains. That results in a “heads I win, tails you lose” situation in which the government effectively rips off investors. This encourages people to hold cash rather than invest in risky start-up enterprises that could create jobs, since it makes sense to hold cash rather than investing if you think you could lose money on a large scale due to either a depression or a jump in investor risk aversion that cuts the resale value of risky stock (for example, a shift by the investing public away from risky assets during a financial panic, or period of falling public confidence in the economy).

Progressive columnists have been busy spreading the myth the the Great Depression occurred because Herbert Hoover cut spending and practiced laissez-faire economics. In reality, President Hoover more than doubled government spending as a percentage of the economy, and imposed burdensome government restrictions on economic activity, like the Smoot-Hawley Tariff of 1930, which reduced wiped out most of America’s exports, and destroyed jobs both in America and overseas. As I noted recently in the Ottawa Citizen (making points similar to my earlier letters in newspapers like the Washington Post, New York Times, Edmonton Journal, and Winnipeg Free Press),

Hoover never practised austerity; His government dramatically increased government spending. Federal spending rose from three per cent of the U.S. economy in 1929, the year he took office, to eight per cent in 1933, the year he left office. The nation’s budget deficit became so huge as a result that by 1932, it was spending more than two dollars for every dollar it took in. It was not austerity that deepened the Great Depression, but other measures backed by President Hoover, like the Smoot-Hawley Tariff of 1930. That increased tariff triggered trade wars between the U.S. and other countries that wiped out millions of jobs.

I earlier explained here and in the St. George Spectrum how the prolonged nature of the Great Depression was caused by bad government policies, not insufficient deficit spending.