Elimination Of Capital Gains Tax For One Year Would Put Bottom In Markets & Economy

You want the market to bottom? Eliminate capital gains taxes for 1 year, and watch the market fly. Right now there is absolutely ZERO incentive to take on the risk of owning stocks! Valuations, fundamentals, no one cares! The demand side of the supply/demand equation with respect to equities has been hacked 75% which means we can not see equities rally more than 10-20% or for more than a few days. There is simply not enough money out there to produce any sustainable long term gains! Notice how we’ve rallied for a couple days multiple times, only to wipe out all those gains and more in one single day! That is the problem, there is no money on the demand side willing to truly take a long term commitment to owning stocks. Is there money out there, yes, but right now it feels much safer in a risk free environment. Give that money some sort of incentive to take risk again, and you will see money come back to this market!

Moreover, for those that think the government simply can not afford to slash capital gains taxes at this time, think again. The effect of slashing capital gains on government revenue would be minimal in my opinion, as no one is making any money right now in stocks as it is, taking 20% of 0 = 0!! However, if you slash capital gains, sure the government collects no revenue on the gains but equity prices will rise, Funds, Hedgies, Banks and most importantly AMERICANS will make money and get to keep it for one year. This money will trickle throughout the economy and produce increased sales whereby the government can collect tax revenue! GDP will increase, Americans will feel wealthier, retirement accounts will rise, and Banks may even make enough money to start loaning again! Second of all, as equity prices rise, companies with “high” debt loads will have the opportunity to do secondaries again at reasonable prices!

Sure the credit markets are frozen and currently irrepairable, but the equity markets can be repaired and are a major source of capital to every company out there. However, again there is simply no one willing to take on the huge # of shares companies need to sell to raise sufficient capital at this time, and that is because of deflated stock prices! Raise those stock prices, and the amount of shares needed to be offered to raise the same amount of capital decreases!

Is this the ultimate solution to fix all our problems? Probably not, but it’s as good as any other solution being presented right now!

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Comment by David

2009-02-21 16:02:05

Lefties - especially in the UK & Europe - wld scream blue murder at this idea!!

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