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Dr. Reagan’s Magic Elixer

Economy, Politics, US Economy, US Politics
Theodoric of York and patient

Theodoric (R-York)

The Republicans, it seems, have a solution to every problem.  Or, to be more precise, the Republicans have a solution to every problem.  Like the medieval barbers who thought that the cure for every malady was bloodletting, the GOP believes that the cure for every ailment is tax cutting.  The economy is good?  Cut taxes!  The economy is bad?  Cut taxes!  Taxes are too low?  Cut taxes!  I await the inevitable day when the Republican Party advocates tax cuts as a means of overturning Roe v. Wade, forestalling gay marriage, and putting a massive granite sculpture of the ten commandments in every federal courthouse.  Remember, if we don’t cut taxes, the terrorists have won.

The latest GOP quacksalver to prescribe this nostrum is the Republican Study Committee, a bunch of right-wingers that used the opportunity of the Wall Street bailout to push for a two-year moratorium on the capital gains tax and, in the process, also managed to scuttle the Wall Street bailout.  According to the folks at NRO, the RSC plan would be just the tonic for an ailing economy.  “Private capital will flood into Wall Street with zero capital gains and it will come at no cost to the taxpayer.”

Now, you may be asking yourself: “how many different kinds of crazy is this proposal?”  Well, first of all, assessing lower taxes on capital gains is justified primarily as a means of encouraging investment (it also compensates very roughly for inflation, but a system of indexing could work just as well).  The problem, though, is that, in the short term, cutting capital gains taxes merely encourages the sale of capital assets.  Far from encouraging investment, the elimination of capital gains taxes would instead lead to a fire sale of assets, with the inevitable result that prices would fall.  Moreover, a two-year moratorium won’t encourage the kind of long-range investment that either the economy needs or that Republicans tend to tout as the chief virtue of low capital gains taxes.  Instead, it would, under normal circumstances, simply push more assets into the marketplace and depress prices even further.

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