A Winning Playbook For Saving Cap Gains

Investor’s Business Daily | They say the only things certain in life are death and taxes, but the capital gains tax hike heading straight for us isn’t necessarily inevitable. By looking at eerily close historical parallels, it isn’t over until it’s over.

Are capital gains taxes going up? How high? And when?

Unless Congress acts and the president puts his John Hancock on legislation, the top tax on capital gains will increase to 20% from 15% on Jan. 1 for many taxpayers. President Obama agrees. But that’s not the end of the story. Believe it or not, the recently passed health care law increased the top capital gains tax to 23.8% in 2013. Don’t be surprised if other populist hidden taxes on capital gains creep into law before the end of the year.

Congressman Sander Levin, chairman of the tax-writing Ways and Means Committee, may move a capital gains tax increase through the House of Representatives before the August recess. It may stall in the Senate and be resolved in a “lame duck” session of Congress, after the Nov. 2 elections. There’s no time to waste to lobby against this tax increase and to plan for next year.

What should an investor do?

It depends on how clear your crystal ball is. The great philosopher Yogi Berra said, “It is difficult to make predictions, especially about the future.” From 30 years of experience with capital gains tax hikes and cuts, I would add that is especially true about the capital gains tax.

However, I will bet that any capital gains tax hike (other than the health-care capital-gains tax increase) will only be effective in January 1, 2011, and thus one can wait until New Year’s Eve to avoid being hit with higher cap gains taxes.

In the past, smart investors outmaneuvered the tax man. For example, to beat the 1986 capital gains tax law, the realizations of gains jumped to $318,944 million before the new law went into effect and then dropped to $140,386 million the next year.

Is it a done deal?

Remember Jimmy Carter? In 1978, President Carter proposed taxing capital gains as ordinary income; “it was a tax windfall for millionaires,” as he called it back then. We had a Democratic Congress and all the pundits and Washington wise men said that a capital gains tax hike was on its way. The strategy of established Washington business organizations was simply to keep current law.

But some California entrepreneurs knew how damaging such a tax could be to the U.S. economy. Ed Zschau, a Silicon Valley entrepreneur, along with venture capitalists working with small high tech startups and the American Council for Capital Formation, turned tax policy upside down. At the end of the day, the maximum capital gains tax was reduced almost by half to 28% under the Revenue Act of 1978. Later it was reduced again to 20% and ultimately to 15%.

Similarities between that fight and today’s are striking: an administration and Congress controlled by one party, a fragile economy, raging populism and a defeatist attitude among the investor community. (And, I’m happy to report, Zschau, ACCF veterans Richard Rahn and I are still kicking and looking at a good chance at succeeding this time, as well.)

Is preventing a massive capital gains hike realistic?

Absolutely! It will be tough but doable for several reasons.

First, there’s tremendous pushback among the electorate against bigger government and its intrusive role. Confidence in elected officials is at an all-time low. The politically potent American middle class — the key to electoral success — will eventually be confronted by the clear and present danger that their jobs, savings and retirement security are at risk.

Second, President Obama, House Speaker Nancy Pelosi and Senate Democratic Leader Harry Reid know that they can pursue their larger agenda only if their “majority makers” are re-elected. These 40 to 50 congressmen represent moderate to conservative districts that Republican John McCain carried in 2008. Those majority makers are more inclined to vote in the interests of their district and good economics than someone else’s ideology.

Pulitzer Prize-winning author and columnist Thomas Friedman recently bemoaned the lack of entrepreneurship, startup companies and the jobs they create. As part of his solution he recommended: “I’d also cut the capital gains tax for any profit-making venture startup from 15% to 1%. I want our best minds to be able to make a killing from starting new companies rather than going to Wall Street and making a killing by betting against existing companies.”

Are capital gains tax cuts just trickle-down Republican economics?

No. History teaches us that low capital gains taxes have had a strong cross-partisan flavor. JFK was a cap gains tax-cutter. Under FDR there was a sliding scale in which the longer you held the asset, the lower the tax faced when selling. Centrist Democrats are attracted to the concept of a rollover wherein if you reinvest, you’re not taxed but if you consume you are.

That cross-partisan appeal is surfacing now. Liberal Democratic Congressman Jared Polis wrote a “Dear Colleague” letter to all of his fellow members of the House of Representatives drawing attention to my campaign to lower capital-gains tax rates. He said, “I agree with Mark Bloomfield, now is the time for optimism. With common-sense, time-tested investment tools we can ensure economic growth, job creation and restoration of our nation’s industries without endless public bailouts by rewarding private investment.”

Before coming to Congress, Polis was an entrepreneur in his own right. He founded several high-tech startups, including Blue Mountain greeting cards on the Web while he was a Princeton undergrad. Ernst & Young subsequently named him “Entrepreneur of the Year.”

What’s a big difference in our favor from then to now?

One is that our “nest eggs” for our “golden years” used to come from traditional pensions (“defined benefit plans”). Now we have to depend on 401(k) plans, stocks, mutual funds and other savings, often in the stock market and very sensitive to the capital gains tax.

Also remember that Americans every day are becoming more skeptical about the government’s ability to create an environment where the private sector can promote economic and job growth and create a decent standard of living for us and our children.

So, what’s the plan?

The American Council for Capital Formation is putting out a call to action to the vast American Middle Class, entrepreneurs and investors to join us in a Horatio Alger movement, named after the famed “rags to riches” author who was an early subscriber and proponent of the American dream.

We have a three-pronged game plan:

  • Good old-fashioned lobbying — not from Washington — that mobilizes pillars of the community in key Senate and congressional districts.
  • Investing in the best analytical work on why the rest of the world understands what we seem to have forgotten — why low cap gains are essential for a strong economy, job creation, entrepreneurship, innovation and retirement security.
  • Looking not just to the past but to the future, relying on a full-scale debate in traditional media and the world of new media. Whether it’s a tweet or a column, every American should know that a capital-gains tax hike will harm our economy and their retirement security.

Bloomfield is president and CEO of the American Council for Capital Formation, a nonprofit, nonpartisan organization.