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End Oregon’s Capital Gains Tax

Cascade Commentary

Summary

The more something is taxed, less of it is produced. The capital gains tax punishes the very thing that encourages growth in the economy. Consequently, less wealth is created to invest in worthy enterprises that benefit workers, business owners and investors alike.

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The capital gains tax is detrimental to Oregon’s economy for a variety of reasons, the most basic being that the more something is taxed, less of it is produced. The capital gains tax punishes the very thing that encourages growth in the economy. Consequently, less wealth is created to invest in worthy enterprises that benefit workers, business owners and investors alike.

“A tax on capital gains provides a disincentive for investors to channel their assets into capital-creating enterprises that foster economic growth.”

Capital gain is the difference between the selling price and the purchase price of an asset. An increase in value is penalized by the capital gains tax, yet because of the voluntary nature of this tax—it is only realized when the asset owner decides to sell—capital gains tax rates can have a profound impact on the movement of investment capital within the economy. The investment of capital in projects that would create value involves risk, and it takes ingenuity to recognize these opportunities. The reward of a greater return, or capital gain, provides the needed incentive for investors to take risks. A tax on capital gains provides a disincentive for investors to channel their assets into capital-creating enterprises that foster economic growth.

Although the principal harm effected by the capital gains tax is the inhibition of capital formation, other inequities are perpetuated by this tax. The fact that capital gains are not indexed for inflation unfairly harms investors. Not only must they pay tax on real value gains, but they are also taxed on illusory gains from inflation. This is one of the various facets of the capital gains tax that works to create a bias against risk takers—the individuals who drive the economy forward with their genius and innovation.

“A repeal of the capital gains tax also would improve the economic environment for Oregon. … In the effort to keep firms from fleeing the state and to attract new businesses to Oregon, every effort must be made to make the state as appealing as possible.”

Repealing the capital gains tax would permit wise investments to be rewarded, yet it is not only the wealthy who would benefit. The Cato Institute report, “The ABCs of the Capital Gains Tax,” states: “Roughly 95 percent of the fluctuation in wages over the past 40 years is explained by the capital-to-labor ratio. When the ratio rises, wages rise; when the ratio flattens, wages stagnate.” Laborers would benefit if capital gains were permitted to grow unimpeded, driving the elevation of both wages and the standard of living.

A repeal of the capital gains tax also would improve the economic environment for Oregon. Oregon’s capital gains tax rate is 9%, the third highest in the nation, making Oregon far less competitive than more business-friendly states. In the effort to keep firms from fleeing the state and to attract new businesses to Oregon, every effort must be made to make the state as appealing as possible. For investors determining the most fiscally attractive location, a high capital gains rate can be the negative factor. For a competitive edge in an increasingly globalized world our legislators should repeal the capital gains tax, allowing the economy to grow and prosper, something that ultimately will benefit everyone.

The capital gains tax is unjust and destructive to the goal of developing a vibrant economy full of great opportunities. As investors are allowed to receive their due reward for making wise financial decisions, consumers and workers are the ultimate beneficiaries. The politically and economically sound decision is to repeal the capital gains tax.

Elizabeth Harrison is a recipient of The Woodard Family Fellowship at Cascade Policy Institute, a Portland, Oregon, think tank. The 2007 valedictorian of Hillsdale College, Elizabeth has a degree in economics and mathematics. She completed this paper as part of her 2006 summer research internship, made possible by a grant from The Woodard Family Foundation of Cottage Grove, Oregon.

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