‘Republican House leaders are planning to offer a set of tax breaks … to help individual investors who got burned in the recent market meltdown, in a bid to regain the upper hand in the debate set off by corporate scandals, Thursday’s Wall Street Journal reported.” Jim Thorp: “Any opinions on this? I would think it would only increase selling pressure on stocks (take up to $10,000 in losses instead of $3,000 against income).”

☞ Well, in the short run, raising the ceiling on deductible stock-market losses would indeed induce some selling. People would take more losses to lower their tax bills.

But it would also induce buying over the long term, as it made investing marginally more appealing. The cost of betting wrong would drop, while the reward for betting right would remain unchanged. On the margin, more people would want to play. (The same would be true in Las Vegas, if the pay-out on slot machines were ratcheted up.)

Indeed, such a move could be perceived as so investor-friendly it could spark a rally, not a sell-off.

There are three reasons to make a change like this:

First, inflation. The limit has been $3,000 as long as I can remember, going back at least 35 years, I think, when I first started losing money in the stock market. So if $3,000 made sense then, $15,000 or so would make sense now, just to be equivalent.

Second, fairness. The current system is all too reminiscent of “heads I win, tails you lose.” If there is no cap on the net gains that are taxable, why should there be a cap on the net losses that are deductible?

Third – the apparent reason it has been proposed – it would be popular with investors, who vote.

But there are two better reasons NOT to make the change:

First, we can’t afford it. We are back sloshing around in borrow-and-spend Republican deficit territory, as you may have noticed, and this nice tax cut would just make it worse. Uncle Sam would fall deeper into the red (which might not be great for the market either).

Second, it would shift yet more scarce resources toward the generally best off. Not to say that a ton of “ordinary people” haven’t gotten killed in the market. They have! But not a dime of this break would go to people whose 401(k) balances were decimated (you can’t take losses on stocks within a retirement plan). Not a dime of it would go to folks who lost “only” $3,000 or less. Raising the ceiling wouldn’t help them. Not a dime would go to the tens of millions of American households that, rightly, given their circumstances, don’t invest in the market. And relatively little of it would go to those who are in the lower income tax brackets.

If you had $5,000 in net realized losses and were in the 15% tax bracket, then being able to deduct that extra $2,000 this year would cut your taxes by $300. But if you were in the 39.6% bracket and had $10,000 in net losses, the extra $7,000 this tax-law change would allow you to deduct would save you $2772 – more than nine times as much.

Now, you may say, of course the best off will get most of the aid from a thing like this – they’re the ones who suffered the most. I would just point out that our Republican friends have already been deeply moved by, and attentive to, the plight of the best off. But that every billion we forgo to ease their burden is another billion that – one way or another – everybody else has to make up.

Our Republican friends won the last election with the promise of tax cuts that they said we could afford – even headed into an economic downturn – while still providing a prescription drug benefit to seniors, beefing up our military, protecting the Social Security Trust Fund, and continuing to pay down the National Debt.

It proved to be disastrous economics, just like the last massive tax cut for the best off (a tax cut that George Bush senior tagged “voodoo economics” when he was running against Ronald Reagan in 1980, and before we added $3 trillion to the national debt) . . . but effective vote getting.

So here we go again (albeit, with this particular proposal, on a smaller scale).


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