Capital Cuts

THE odds seem very good that the 1997 budget battles will include some sort of broad-based cut in the capital-gains tax. The Associated Press reports that “one of Capitol Hill’s biggest arguments now is not whether capital-gains taxes should be cut, but by how much and when.”

The details matter. Some Democrats favor “targeted” tax relief. But efficient allocation of capital requires that investors make their decisions on the basis of economics, not political favoritism. To use tax policy to bribe investors to hold the wrong investments for too long just impairs the liquidity and mobility of capital. “Short-termism” is a hoax. Managers of firms are not influenced by how long investors hold their shares, but by the value the market places on those shares. And the value of shares does not depend on how many years they are owned by the same person.

About the Author

Alan Reynolds

Alan Reynolds, National Review’s economics editor from 1972 to 1976, is a senior fellow at the Cato Institute and the author of Income and Wealth.

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THE odds seem very good that the 1997 budget battles will include some sort of broad-based cut in the capital-gains tax. The Associated Press reports that “one of Capitol Hill’s biggest arguments now is not whether capital-gains taxes should be cut, but by how much and when.”

The details matter. Some Democrats favor “targeted” tax relief. But efficient allocation of capital requires that investors make their decisions on the basis of economics, not political favoritism. To use tax policy to bribe investors to hold the wrong investments for too long just impairs the liquidity and mobility of capital. “Short-termism” is a hoax. Managers of firms are not influenced by how long investors hold their shares, but by the value the market places on those shares. And the value of shares does not depend on how many years they are owned by the same person.