As Shlaes writes in The Forgotten Man, if Hoover caused the Depression, FDR prolonged it by constantly attacking the investor class, whom he called the “malefactors of great wealth”–a phrase originally said by the first Roosevelt, Theodore. FDR’s attempt to pack the Supreme Court in 1937 was driven in part by his wish to tax the rich retroactively.
Consider this thought experiment: Imagine if the incoming Congress and Obama administration raised taxes on capital gains to 30% only to discover that the revenue receipts were not as high as planned. So imagine they then applied the 30% rate to all gains since 2003.
That’s essentially what Roosevelt wanted to do. Sensibly enough, the Supreme Court rebuffed him. Thus did FDR try to pack the Court in 1937 by adding one new justice for every sitting justice over age 70.
That’s how capital goes on strike. It goes on strike when it is attacked or when the rules are unclear.
If President-elect Obama wants to be a hero and get credit for pulling the economy out of the ditch, he has to get capital off the strike line. Demand-side stimulus, whatever its merits might be, won’t do that. The only policy levers that will get capital back in the productivity game is a monetary reinflation accompanied by the promise of reasonably low tax rates–let’s say 20% for capital gains, dividends and corporate rates.
The capital gains tax, of course, must be indexed for inflation.
If Obama can get capital back in the game, the economy will recover quickly. Elsewhere on today’s Edgelings (and in the Wall Street Journal) my friend Mike Malone suggests some regulatory reforms that will also get capital off the strike line. READ MALONE’S STORY HERE
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10 Comments
1. mike123:If Obama wanted to kick the economy in the arse and get credit for it, he should forget about typical democrat stimulus. Instead, he should shock the world with $1Trillion of tax relief, a-la-kennedy, reagan.
Target it to get investment going …..
1) Eliminate Cap Gains – frankly this is not a loss of revenue as most investors have enough Capital losses to carry forward for a lifetime.
2) Reduce Corporate Tax rates to 20% – Also a not a loss since most businesses are now losing money.
3) Encourage Manufacturing of Products with a tax rate of 10% (free trade agrements be damned).
4) Help the middle class by going with a flat tax of 15%
The result would be the mother of bull market rallies.
Then next step ….. propose to eliminate income taxes and replace with a tax on Crude Oil and Natural Gas Imports.
Obama should have the votes to get this done. Most of the Conservatives would go for it and so would Obama loyalists. Guys like McAmnesty, the RINO sisters in Maine, and others will oppose but Obama would have the votes.
I doubt it would happen but I can dream.
Dec 22, 2008 - 2:49 pm 2. Russell Zagrodzky:Congress and the Executive have created our financial mess because they have too much freedom. Their out of control tax and spend train has arrived at the station. The Massive Fraud and Corruption Express is boarding. All aboard! No…really…all aboard.
The only route to a solution is a constitutionally driven tax reform. http://www.hedgehogparty.com
Dec 22, 2008 - 3:00 pm 3. Transterrestrial Musings » Blog Archive » Atlas Is Shrugging:[...] Karlgaard says that capital is on strike. He has some good policy recommendations that the Obama administration is unlikely to [...]
Dec 22, 2008 - 3:41 pm 4. Concerned Citizen:Capital IS on strike, er, that is the unencumbered capital that hasn’t been already wiped out. Government will only quit spending when everyone quits lending them money and a high stakes game of musical chairs that is being played between the U.S. Treasury, European banks, Arabs and Chinese are going to be interesting to watch. What happens when no one shows up to buy U.S. Treasuries, much less invest in business when the incoming president wants to keep most of the profits?
Who is going to pay the $2 trillion bill coming due next year? There were $1.9 trillion in retirement plans with a 401k feature — this is why Congress want to “help” out all those future retirees with a government backed fixed return fund (i.e. we’ll take your money, pay you 3%, and give it back when we feel like it). They’ve got another year of spending before they are completely tapped out, then our currency will take the hit. For some periods in history, capital is not rewarded, only preserved. Sad to say, Mike123, it’s only a dream.
Dec 22, 2008 - 3:54 pm 5. capitalistpig:My capital isn’t on strike … it’s quit!
And with cause. You tax my capital to punish me for creating wealth that I distribute to my employees. So, my capital and me have found a nice island where we’re enjoying a different woman every night, steaks and lobster on the barbie.
I don’t HAVE to create jobs. I have plenty of wealth, enough to last me 10 lifetimes. I don’t have to put my capital at risk. And if you punish me for creating jobs for people; if you threaten to take my capital and “spread the wealth” then you’ve laid out your terms.
I reject those terms. So, me and my riches will just enjoy consumption for a while until you wise up.
Dec 22, 2008 - 4:12 pm 6. Alyssa van den Finegold:Neither Obama nor his advisors are intelligent enough to decrease taxes on the productive and investing classes. As full scale populists (closet fascists) they intend to grow government and tax their way into prosperity and control over every part of a citizen’s life.
Think local and regional economies. That is the only way to grow out of this globally hyper-leveraged mess. Idiots in control will focus on the huge and dying industries of the past. Smart people need to focus on the up and coming industries of the future.
Capital does not have to be huge to get new industries of promise started. It only has to be on the spot.
Dec 22, 2008 - 4:31 pm 7. Greg Ransom:What would Uncle Milton have said? Let’s hope he would have been honest and said his monetarist version of labor based macro didn’t help him as all to see what was happening — in contrast to how Hayekian macro DID allow the Hayekians to sound the alarm in advance.
Dec 22, 2008 - 11:47 pm 8. myth buster:Enact the Fair Tax: 0% corporate rate, 0% capital gains and dividends, 0% ordinary income tax, 0% FICA taxes, 30% Federal Sales Taxes (23% income-tax-equivalent rate) on above poverty level consumption (accomplished by rebating the taxes on poverty-level consumption).
Dec 23, 2008 - 5:09 pm 9. BizzyBlog » Things I’d Like to Post About Today ….. (122408, Morning):[...] Rich Karlgaard observes that “Capital is on strike now. ….. (on the second page of the link) It goes on strike when it is attacked or when the rules are unclear.” Attacks? Evil oil companies; “selfish” people (who have the nerve to resist tax hikes); coal and oil “are making us sick.” Check. Rules unclear? Bailing out companies that have failed, in effect handicapping their competitors; Supporting an unlawful sit-in at a shut-down company, and shaking down banks to “solve” it; “putting a gun to the heads” of bankers who would rather not have government “preferred equity” investments. Double-check. There could have been many more items noted. Solutions? Lower taxes, especially on capital gains, and predictable rules. [...]
Dec 24, 2008 - 4:03 am 10. Oldguy:Well, i’m glad that I read the novel, “Atlas Shrugged”,for now
I have an actual programme to follow the collapse of the US
economy with.
oldguy
Dec 25, 2008 - 7:54 am