Abolish Capital Gains Tax
PRO
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“The tax on capital gains directly affects investment decisions, the mobility and flow of
risk capital... the ease or difficulty experienced by new ventures in obtaining capital,
and thereby the strength and potential for growth in the economy.”
It is because of John F. Kennedy that my partner and I must agree that
Resolved: The United States should abolish the capital gains tax.
Observation: The Con side must prove that the Capital Gains Tax is beneficial in the
status quo, otherwise their impacts are non-essential.
[OPT] - Definitions:
Capital Gains Tax - A capital gains tax is the tax on the profit from a fixed asset.
In order to prove that Pro is right, the following contentions are offered
Contention 1- Harms to the Middle Class
For many in the middle class, the capital gains tax represents a significant obstacle, one
most families cannot overcome. As Goldman ’95 notes,
In contrast,
middle-class families who have either invested in securities or built small
businesses typically must sell a large portion of their investment at the peak of
their savings, in order to pay for a large expense like retirement, a child’s
education, or the purchase of a home. At that time, these investors have no
choice but to pay tax on their capital gains.
Abolish Capital Gains Tax
PRO
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However, wealthy investors, the ones this tax is supposedly aimed at, have a number of
ways to avoid paying the tax. As Goldman ’95 continues,
Moreover,
the wealthy investor has natural advantages in avoiding taxes. Because he
has a larger portfolio, he will have to liquidate a much smaller percentage of it in
a typical year than a middle-class investor would. Further, because he has more
capital to begin with, he will have more flexibility to buy high-risk securities.
That means more of the individual securities he buys will lose money even
—
though the overall return on his portfolio will be just as high as, or higher than,
that of a middle-class investor.
Additionally, Kleinbard ’15 identifies that rich investors easily evade capital gains
taxation by using tax havens as a means of securing their wealth.
What all this means is that
capital gains
arising
after relocating to Puerto Rico are exempt from taxes
everywhere in the world. A taxpayer’s built-in (unrealized) capital gains at the
time of his relocation
(like our hypothetical billionaire’s paper gains on his startup company)
require a bit more patience, but after
10 years the only tax on sale is a 5 percent Puerto Rican capital gains tax on
those pre-relocation accrued gains. With great wealth comes great capital gains
evasion opportunity.
Abolish Capital Gains Tax
PRO
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Contention 2 - Harms to Businesses
Subpoint A: Entrepreneurship
One of the problems facing new businesses and entrepreneurs today is the overarching
effects of capital gains taxes. Gendry, Ghandi, and Nguyen ’16 explain why this is
true:
First, capital gains taxes
may
create an additional level of taxation on successful
entrepreneurs. Second, asymmetric taxation of capital gains and losses
heavily than losses) may be an especially important issue for entrepreneurs; the asymmetries in the tax system may
(in which gains are taxed more
discourage entrepreneurs from taking risk. Third,
much like the commonly-referenced lock-in effect of capital gains taxes on
investments in stock, entrepreneurs may become locked into closely-held
businesses; this lock-in effect may distort whether firms are owned by the most
efficient manager for the firm. Fourth, capital gains taxes can affect the cost of
capital for entrepreneurs.
In addition, Renwick ’09 discusses the gain to small businesses from zero capital gains
taxation.
First and foremost, businesses would have more of an incentive to invest capital
in all areas of their business
, including labor, capital, and research and development.
Moreover, businesses would be able
to finance their debt at a lower cost if capital gains were not taxed. In today’s
market,
businesses seek out
new stocks or bonds
to finance their investments. Those assets
will be more desirable if investors
do not have to pay the capital gains tax on the revenue gained from the
investment. As these corporate assets become more appealing, this will drive
down the cost of capital for companies, facilitating investment by companies so
that they can grow and hire more employees.
Abolish Capital Gains Tax
PRO
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EXT: Hederman ’06 => Reducing CapGain means Better Economic Strength
——————————————————————————————————————Subpoint B: The Double Tax and Lock-In Effect
Along with Capital Gains harming the creation of businesses, it also continues to harm
businesses that are already established. As Mitchel ’16 notes,
It turns out that there are many reasons why the capital gains tax harms
economic performance.
Clemens, Lammam and Lo explain
the "lock-in effect." {of} Capital gains are
taxed on a realization basis. This means that the tax is only imposed when an
investor opts to withdraw his or her investment
One
of the most
from the market
and realize the capital gain.
significant economic effect is the incentive this creates for owners of
s
capital to retain
are available.
their
current investments even if more profitable
Economists refer to this result as the "lock-in" effect.
and productive
opportunities
Capital that is locked into suboptimal investments
and not reallocated to more profitable opportunities hinders economic output
Furthermore, Edwards ’10 explains how, along with the lock-in effect, double taxation
also harms corporations and the economy.
Double taxation of capital gains
and dividends
disadvantages corporate equity
compared to debt.
The
result is that firms tend to over-leverage, which makes them more unstable and
vulnerable during downturns. Even with federal capital gains
and dividend
tax rates at 15
percent, the U.S. tax system is biased against corporate equity. A key reason
for reducing tax rates on
both
capital gains
and dividends
is that the underlying income is
already taxed at the corporate level. With respect to capital gains, note that
share values generally equal the present value of expected future earnings.
corporate
If the value of expected earnings rises, shares will increase in
value, which creates a capital gain to the individual. But those future earnings
Abolish Capital Gains Tax
will be taxed at the corporate level
PRO
when they occur.
Thus hitting taxpayers
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now
with a
capital gains tax is
double tax .
ation
In the end, the capital gains tax must be abolished because it hurts the middle class,
small business and harms the economy.