Last Friday, President Bush was asked whether he had picked up any favorite policy ideas from his economic forum in Waco, Texas. "There are some interesting ideas—expensing losses, increasing expenses of losses,"said Bush. "There's a lot of interesting talk about capital gains taxes," he added. Administration officials and members of Congress are reportedly considering both proposals: cutting taxes on capital gains, and increasing the tax deduction for investment losses. The combination is incoherent. If the government has no business taking your money, it has no business bailing you out.
Ever since the inception of the capital gains tax, conservatives have tried to cut or repeal it. Philosophically, their argument is twofold. First, corporate profits are already taxed, so taxing them again in the form of shareholder gains is double taxation. Second, as the libertarian Cato Institute puts it, "When taxpayers undertake risky investments, the government taxes fully any gain that they realize. … But the government allows only partial tax deduction (of up to $3,000 per year) if the venture goes sour and results in a loss." In short, gains and losses should be treated equally, and gains should be untaxed.
Bush and his aides profess to share these libertarian instincts. After Bush spoke favorably of a capital gains tax cut on Friday, White House economic adviser Larry Lindsey affirmed that "we need lower taxation of capital on all fronts," and Glenn Hubbard, the chairman of Bush's Council of Economic Advisers, underscored the wisdom of the "capital gains tax changes that the president mentioned." In his radio address Saturday, Bush noted that at the economic forum, "A common theme among many panelists was that we must leave every dollar we can in the hands of the people who have earned it."
But if investors are entitled to keep every dollar they gain in the stock market, it's hard to see why they shouldn't cough up every dollar they lose. That's the principle that Bush and other Republicans propose to violate by increasing the amount of capital losses an investor can write off on his income taxes.
The write-off idea, previously promoted by congressional Republicans, got an important plug at last week's forum from discount brokerage mogul Charles Schwab, who had been designated by Hubbard to kick off a discussion on investment and retirement security. Schwab proposed raising the annual limit on tax-deductible capital losses from $3,000 to $20,000. Bush told Schwab that he loved the idea and that it "makes a lot of sense." Within days, word leaked from Capitol Hill that an expanded write-off, ranging from $6,000 to $9,000, would be the centerpiece of tax legislation scheduled for September.
This isn't an across-the-board reduction of income tax rates. It doesn't apply to wages. It's a special tax break for investments. You can't get it unless you have enough money to invest substantially in the financial markets—substantially enough to lose more than $3,000 in a single year. And if you're in the top tax bracket, the ability to write off your capital losses against your income tax—not just against your capital gains, which you're already allowed to cancel out against your losses on a separate tax form—means you can get back not just 20 percent of your money, but 39 percent.
Don't expect Democrats to stand in the way of this bailout. To win the votes of the "shareholder class," they're more than willing to open the federal treasury to Nasdaq refugees. When asked on Sunday about raising the write-off limit to $20,000, Sen. Jon Corzine, D-N.J., said it "should be considered in an overall package" of tax legislation. The important thing, Corzine argued, is "to put dollars into working Americans' pockets."
That's the kind of money-for-everyone thinking that voters have come to expect from liberals. The problem now is that it's coming from conservatives, too. The reason is obvious: The people clamoring for relief are Republican target voters. Unlike their liberal colleagues, conservative politicians frame this suburban socialism not as a gesture of compassion but as a patriotic attempt to strengthen the stock market. "It is really important to restore confidence in long-term investing," says Hubbard. Really? That's why the government should bail out investors? To make them think their money isn't at risk, when in fact it is?
A few days ago, a Senate Democratic staffer reported that members of Congress, visiting their districts during the August recess, were getting two messages from their constituents. One was that corporate crooks should be jailed. That's certainly the government's job. The other message, largely unrelated to corporate crime, was: "I've lost $20,000 on the stock market. What are you going to do about it?'"
Here's an idea: Nothing.