Low capital-gains taxes help everyone

It may be politically correct to decry those who act out of self-interest, yet human nature drives most of us that way in our daily lives. That’s exactly why no matter how rich or poor you may be, the congressional standoff over extending the capital-gains tax cut ought to scare you silly.

Those who want to raise the levy on investment profits because they see it mostly benefiting the rich may be correct in its direct impact. But those folks need to take Economics 101. Their financial naiveté could cost you serious money even if you wouldn’t know a bond from a banana.

That’s because the secondary impact of raising the capital-gains tax back to where it used to be would be felt as much on Main Street as Wall Street. And frankly, Joe and Jill Six-pack are less prepared to handle its effects than are investment bankers.

If you own your home or have a retirement nest egg invested in the financial markets, or you just depend on a good economy to keep your job, the coming showdown in Congress has your name written on it.

Simply put, if Congress refuses to extend the current capital-gains tax, common sense says it might trigger the type of selling wave that could pressure already-declining real estate, tank the stock market and produce the sort of panic in which people lose jobs.

That’s what happened in the 1980s. Tinkering with the tax code on real-estate investment led to a sell-off that helped create the savings-and-loan crisis and cost millions of Americans their jobs when the economy sputtered.

Economic behavior is a combination of common sense and human nature. Individuals manage their finances based on how best to maximize their money, just as few people pay any more than they have to for products, and most seek the best-paying job they can get.

Sometime in the coming weeks, a House-Senate conference committee will decide whether to retain the 15 percent tax rate on investment income held a year or longer. Without an extension, in 2009 it will revert to the 20 percent rate, where it was until 2003.

The capital-gains tax cut is an easy political target. The wealthy disproportionately benefit from such a change because they have the largest investments. But the politics of envy are not just demagogic, they are dangerous to the rest of us who are not just clipping coupons.

First of all, returning the rate to 20 percent would bring a total of just $7.3 billion more to the federal Treasury in 2009 and 2010, according to the Congressional Budget Office. That may seem like a lot, but it’s a pittance compared with the loss of revenue from other levies if a real-estate and stock-market sell-off hit the economy.

Yes, government should not do anything to help those who are already ahead of the game at the expense of those who are not. It is a simplistic notion, however, that anything that helps the more affluent inevitably hurts the less affluent.

That also reflects a mentality that there is something wrong with being successful, and therefore those who are need to offer a penance to those who are more morally upright but less affluent.

Remember, slightly more than half of all households are invested either directly or indirectly in the stock market. And just under two-thirds own their homes. The vast, vast majority of these people consider themselves – and are – middle class.

Stock and real-estate prices are based on supply and demand, and unless you have been visiting Venus, you are probably aware that the United States has undergone a historic run-up in housing values. Not only are mansions going for unheard-of prices, but so are more mundane middle-class split levels.

Most profits on the sale of your family residence are exempt from taxation. But if the capital-gains tax were raised, the resulting selling of investment real estate would create a market in which everyone’s values are lower. And investors have spurred much of the housing-price spike.

If Congress does not extend the current rules on investment taxation, it will be telling those with real-estate and stock assets to sell them and pay less in taxes before the rate reverts to 20 percent. A $100,000 gain would net you $5,000 more if you sell while the current 15 percent rate exists than after it is raised. Even a kindergartner could figure out what to do in that case.

That’s why all of us need to make sure members of Congress and senators do the right thing – even if it means they won’t be able to get a sound bite on the news about how they are making sure the rich pay their fair share.