End Oregon’s Capital Gains Tax

By Elizabeth Harrison

The capital gains tax is detrimental to Oregon’s economy for a variety of reasons, the most basic being that the more something is taxed, less of it is produced. The capital gains tax punishes the very thing that encourages growth in the economy. Consequently, less wealth is created to invest in worthy enterprises that benefit workers, business owners and investors alike.

Capital gain is the difference between the selling price and the purchase price of an asset. An increase in value is penalized by the capital gains tax, yet because of the voluntary nature of this tax””it is only realized when the asset owner decides to sell””capital gains tax rates can have a profound impact on the movement of investment capital within the economy. The investment of capital in projects that would create value involves risk, and it takes ingenuity to recognize these opportunities. The reward of a greater return, or capital gain, provides the needed incentive for investors to take risks. A tax on capital gains provides a disincentive for investors to channel their assets into capital-creating enterprises that foster economic growth.

Although the principal harm effected by the capital gains tax is the inhibition of capital formation, other inequities are perpetuated by this tax. The fact that capital gains are not indexed for inflation unfairly harms investors. Not only must they pay tax on real value gains, but they are also taxed on illusory gains from inflation. This is one of the various facets of the capital gains tax that works to create a bias against risk takers””the individuals who drive the economy forward with their genius and innovation.

Repealing the capital gains tax would permit wise investments to be rewarded, yet it is not only the wealthy who would benefit. The Cato Institute report, “The ABCs of the Capital Gains Tax,” states: “Roughly 95 percent of the fluctuation in wages over the past 40 years is explained by the capital-to-labor ratio. When the ratio rises, wages rise; when the ratio flattens, wages stagnate.” Laborers would benefit if capital gains were permitted to grow unimpeded, driving the elevation of both wages and the standard of living.

A repeal of the capital gains tax also would improve the economic environment for Oregon. Oregon’s capital gains tax rate is 9%, the third highest in the nation, making Oregon far less competitive than more business-friendly states. In the effort to keep firms from fleeing the state and to attract new businesses to Oregon, every effort must be made to make the state as appealing as possible. For investors determining the most fiscally attractive location, a high capital gains rate can be the negative factor. For a competitive edge in an increasingly globalized world our legislators should repeal the capital gains tax, allowing the economy to grow and prosper, something that ultimately will benefit everyone.

The capital gains tax is unjust and destructive to the goal of developing a vibrant economy full of great opportunities. As investors are allowed to receive their due reward for making wise financial decisions, consumers and workers are the ultimate beneficiaries. The politically and economically sound decision is to repeal the capital gains tax.


Elizabeth Harrison is a recipient of The Woodard Family Fellowship at Cascade Policy Institute, a Portland, Oregon think tank. The 2007 valedictorian of Hillsdale College, Elizabeth has a degree in economics and mathematics. She completed this article as part of her summer research internship, made possible by a grant from The Woodard Family Foundation of Cottage Grove, Oregon.

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Posted by at 06:45 | Posted in Measure 37 | 26 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    Oregon is so stupid about its tax policy it is hard to fathom. Why do you thing Washington is the number one retirement destination for Oregonians? Taxes, stupid!

    And it is wise to remember this – how many people were ever hired by a poor person? How many goods and services were ever purchased by the poor?

    But wait, the rich have money and that just is not fair. Let’s take it. That will work, won’t it?

    As Oregon sinks further and further into a left-wing loon induced malaise, just remember, we must go after the rich, take their money, and give it to the poor.

    Current tax policy seems to be working just fine, doesn’t it? Oregon is growing and growing, no one is leaving, busineses are flocking to the state, wow, it’s just great!

    Keep up the good work you great and marvelous and wonderful politicos who are so, so very smart.

    It is sad and pathetic that the people who make the tax policy in this state could not hold a candle intellectually to Elizabeth. They could not debate her on this – they could not even discuss tax policy with her they are so out of her league. And not one of them was ever even close to being valedictorian of anything.

    Out of their minds, do you hear me? Or at least of what is left of them.

    Check the stats if you don’t believe me. The number one place where Oregonians retire is Washington – FACT – by the numbers. We would not want retirees to stay would we? They are such a drain on our state services and they don’t contribute to the economy. Let them go to Washington – and spend their PERS checks up there. It makes perfect sense.

  • DMF

    Oregon is rising to crash. I know I got arguments about this before, but Oregon does not create any wealth. Yes, they build roads, but those roads cost wealth, not make it. If the roads made wealth, they would be sold to the highest bidder. In the meantime, oregon is on a downhill slide. You can’t continue to take from thosse that produce to give to those who do not produce and come out on top of the pile. Simple economics. Methinks our “leaders” should go back and take a few economics classes. Of course they aren’t because the whole thing lines their pockets. Oregon will go bankrupt if changes aren’t made.

  • Bob Clark

    I should think lowering Oregon’s capital gain tax from the ordinary rate of 9% down to 5%, or so, might actually be revenue neutral because it would tend to make Oregon more attractive to wealthy retirees. Oregon does seem to be shifting its economic target to tourism and retirement. Heavy and even light industry is being penalized by relatively high enviromental restrictions in Oregon. So, a capital gains tax rate cut might actually dovetail with current Oregon economic trends.

    That said, however, I’m not sure I would push for the capital gains cut. The politics are such the capital gains cut proposal would generate proposals for new taxes, such as a sales tax. The end result could be more taxation overall as the capital gains tax rate is cut but something like a sales tax is added at a more than compensatory rate. It may be the proverbial case of “don’t kick a sleeping dog.”

  • eagle eye

    What’s left out of the article entirely, if I’m not mistaken, is the effect on state income tax revenue. Would a cut to 0% result in a decrease, or even an increase in state revenue? The proposal is made with nary a consideration of the consequences for the state government. Tell me how it will affect the state budget. If it will result in less revenue, tell me how you are going to modify state government to make up for the loss.

    It’s entirley possible that a cut, say, to 4.5% would actually increase state revenue. I’m more doubtful that a cut to 0% would result in no harm to state revenues.

    Give me a full plan, and I might consider it.

    • DMF

      A Cut to 0% might increase revenue to the state in that an extremely favorable zero rate would very much increase investment in capital assets. This could create much more investment and in the long run not be much of a loss to the state. I’m not so sure Zero % would be good though.

      A 4.5 to 5% rate would still definitely increase investment which would ultimately increase revenue. Investment = income. Income = tax revenue. More economics. I know many disagree, but Bush’s federal tax cuts have increased federal tax revenue. I know the amount I pay has gone up as well as my earnings. Tax cuts= revenue. Basic Economics

      • eagle eye

        My guess is cutting it to 0 would reduce revenue, at least in the near to mid-term. Cutting it in half would increase revenue fairly quickly. Just my guess.

        In any case, I want to see a plan for how to handle any tax cuts in the future. Just saying it’s good for business isn’t good enough for me.

        I think 0% has zero chance to fly. Cutting it in half might have a chance.

  • Regina T

    There’s no reason why capital should be taxed at a lower rate that labor, unless your goal is to further enrich the already-rich. Those who make a living via capital deserve to pay exactly the same rate as those who make a living via their labor. It’s the only fair way.

    • Snow

      There is no equality. If you take all the revenue and divide it equally between the rich and the poor, in a very short time the rich will be rich again and the poor will be poor again. WHY? It has to do with desire. Desire to get ahead, desire to become something. The poor as a rule only want what the rich have but are unwilling to do what it takes to get there. The rich, well they want to be rich. You can’t change human nature, but you can encourage the poor to work toward riches, not to put down those that work to get there. there is no equality. There is, though a desire to be as much as you can be. That cannot be legislated. Use your head, it was put on your shoulders to do something besides keep your ears apart. Don’tcondem those with ambition because those that have no ambition, still have no ambition

  • Jerry

    Oh, Regina, if only life was fair. Why is it fair that a rich person pays the same for a loaf of bread as a poor person? Explain that to me if you want “fairness” in the tax code.

    You left wingers have so much to learn and so little time. If you dropped the capital gains tax entirely it would actually benefit everyone in the state – rich and poor alike, but I guess you don’t want that. You want the same old status quo – and how is that working out?

    Are the poor happy in Oregon? Maybe they are – but the state is not doing well and changes need to be made. Otherwise the blood letting continues and the poor person’s share of a smaller piece of the pie is not going to help.

    The tax situation in Oregon is making that pie shrink, too, just look around.

    And you people worried about state revenue. What a joke. If the elimination of the tax reduced state revenue that would be a good thing. The state needs to cut spending. Period.

  • Regina

    Jerry wrote:
    > Why is it fair that a rich person pays the same for a loaf of bread as > a poor person?

    Jerry, if you do not understand that they you are an idiot of such extreme proportions that it is a waste of my time to even communicate with you. You are not to be taken seriously.

    Why should not the rich pay their fair share of taxes, Jerry? Huh?

  • Richard

    Regina, why do people like you always peddle that crap in such vague terms?

    You say “Why should not the rich pay their fair share of taxes”?

    Who is the rich?
    How much do you think they do pay?
    What constitutes a “fair” share?

    Unless you have some ideas for answers to these very simple questions there will be no progress in this discussion.

  • Catalyst Administrator

    The last comment was deleted due to the use of profanity. There are hundreds of other blogs with no bounds whatsoever, just not this one. Please let us be civil.

    • Anonymous

      Must have been Kevin

  • Regina

    “Who is the rich?” Jerry, are you really serious?

    The rich are those who make their living off of capital.

    I want to hear your moral argument about why THEY should pay less taxes than those who make their living off of their labor. A serious, philosophical argument. Please.

    • CRAWDUDE

      You’re right Regina and you make Jerry’s point for him by your statement.

      The rich who live off the capital from their investments are the ones who know how to invest wisely. By dropping the gains tax or eliminating it you give the very people who know how to invest money more of it to invest. By investing their money they increase economic expansion which has the effect of creating jobs so the people who do work for a living have more opportunities for employment. This very expansion generates many more tax dollars over the long term and enhances our economic stability.

      • David from Eugene

        Crawdude

        The basic problem with this justification is that a similar one can be constructed argue that income from a person’s labor should not be taxed. Consider the following; it does not matter the quality of the raw materials or the brilliance of the design, if no one labors to build the product all that you have is a roll of blueprints and a pile of materials. Of course, without the Capital investment, all you would have is a group of people standing around looking at blue prints and without the Idea the people would be standing around in a silent factory.

        As the production of a product requires the contribution of all three (Capital, Labor and the Idea), why shouldn’t all three be taxed equally on the fruits of their contribution?

    • DMF

      Regina, the definition of capital is money. What in the heck do you think you live on. Handouts? No you live on money and by your definition you are rich. How much is your fair share?

  • Regina

    So, Crawdude, those with the money to (theoretically) create jobs (and there’s no guarantee their capital will do that) should not have to pay taxes. Is that right? They need not contribute to the upkeep of their society, they need not pay for their responsibilities. Correct? It should all fall on the shoulders of those who labor. Right?

    Please, Crawdude. Please be clear here.

    • CRAWDUDE

      Of course I’m not saying that, this conversation was about Capital Gains taxes not Income taxes. They’ll pay their 9% income tax on their earning like we pay on our earnings in this state.

      I didn’t read all the posts above, I was just going by the artivle its self. I can only assume from your response to my response you were also talking about income tax too.

      Staying on subject I was referring to Capital Gains taxes only.

  • Richard

    Regina there are countless americans and Oregonains who are not rich yet have assets they might sell if the punishment of Cap gains were not so high.
    In fact when the Reagon cuts were being debated and people like you were spouting off the same nonsense about rich people and cap gains an IRS report showed that 85% of capital gaions filers had income of less than $50K and 50% had income of less than $25K. Very often those who get penalized heavily by capital gains are low to middle income earners who decided to or needed to sell an asset and got burned by the tax.
    Exactlty the same as those misinformed back in the Reagan years you are mistakenly believing only the rich fiel cap gains returns.

    Apprently the left has no memory or learning curve so we’llhave to play this thing all over again.

    • CRAWDUDE

      Right now you pay federal capital gains on home sales unless it’s the first house you’ve ever sold. I’m not sure what the Oregon laws are. Richard is right, a large portion of people who pay the gains tax aren’t the rich fat cats some groups in this country want you to believe.

      It’s you and I, a middle class person who sales a home for more than what we paid for it who gets hit with capital gains….etc…

      I read an article once that made an interesting point ” If we took every cent the top 1% of wage earners in this country have……….we’d be able to fund the government for 6 months. E.G. It’s the middle class that funds the lions share of the income tax collected, should they have to pay even more?

  • Richard

    http://www.taxfoundation.org/research/show/1236.html

    Wife-Swapping, Taxes and Spreads Are All Related: Amity Shlaes
    By Amity Shlaes

    Aug. 1 (Bloomberg) — Senate Finance Committee leaders are signaling that Congress will take up the topic of capital gains and private-equity firms next year. And no wonder.

    The 20 percentage-point difference between the 15 percent capital-gains rate that many Wall Streeters pay and the 35 percent income-tax rate paid by a surgeon at a hospital makes a tempting election-year target for Democrats.

    The focus on this particular spread is a shame. What really matters about the capital-gains rate isn’t its relationship to the income-tax rate. What matters to everyone is a capital-gains rate that is low.

    You can see this in the economic numbers over the decades and also, occasionally, in the general culture. When the capital- gains rate is low, America feels like doing business. When the rate is high, the country turns its attention elsewhere.

    Laugh all you like. There is a case to be made that the capital-gains rate affects everything from politics to sports, cars, religion and even relationships between the sexes.

    Consider the record of the past century. From 1922 to 1933, the spread between the top long-term capital-gains rate and the income tax level was sometimes even larger, as wide as 60 percentage points, as Leonard Burman of the Urban Institute notes in “The Labyrinth of Capital Gains Tax Policy: A Guide For the Perplexed”

    Once the capital-gains rate was reduced to 12.5 percent, the 1920s roared. Unemployment sank into the threes, twos, and even ones — a level so low that the 4.5 percent level we enjoy now looks unexceptional. Even anarchists gave up politics and purchased Model T’s to drive girls around in.

    Taxed Economy

    A few years into the Depression, lawmakers raised the capital-gains rate to as high as an effective 23.7 percent, prolonging the economic agony. In this dark and moralistic period, politics seemed more important than economics, since there wasn’t much economics going on.

    The 1950s had a spread that makes today’s look narrow: the top income-tax rate was more than 90 percent, whereas the capital-gains rate for top earners, effective and statutory, was 25 percent. The difference mattered less than the fact that at 25 percent, capital gains were still low enough that the Organization Man earned profits for his corporation.

    That rate persisted into the early and mid-1960s, low enough to keep the country focused on business. The cinematic context that comes to mind here is 1967’s“The Graduate,” released just around the time the capital-gains rate began to edge up. What matters most, as a parent says at poolside, is “plastics” — the great new business. But Benjamin senses that the general outlook is weak, and turns to Mrs. Robinson.

    On the Rise

    In fact, the capital-gains rate was on the rise to an effective 45.5 percent by the early 1970s. Rashly, Congress pushed the effective capital gains up close to 50 percent. That postponed not only innovations, but also the extent to which existing innovations reached the consumer.

    This frozen state is best captured not by Washington’s data but by author Rick Moody in the “The Ice Storm,” later made into a film. One man at a boozy party has a brilliant insight into how to solve an abiding problem, that of packaging breakables for shipping. What about using Styrofoam bits to pack with? If you do that, notes the man in wonder, “delicate stuff, stuff that can get tossed around by shippers, still arrives intact.”

    There ought to be high hopes for the idea: “it is just going nationwide, I see it, nationwide.” But the whole Styrofoam-peanut pitch gets drowned out as the 30- and 40- something guests turn to a venture with greater possibility for immediate realization: wife-swapping.

    Tech Boom

    More recent decades offer yet more evidence for the value of lower capital-gains rates. When the famous Steiger Amendment slashed the capital-gains rate to 28 percent in the late 1970s, venture capital found its footing. As Chris Edwards of the Cato Institute writes on his Web log, the same financial structure that is now under assault by lawmakers helped fuel the growth of a number of companies, from Apple Inc. and Intel Corp., to Genentech Inc., Cisco Systems Inc. and thousands of others.

    U.S. President Ronald Reagan cut the capital-gains tax to 20 percent, at least in his first term, and Treasury Secretary Robert Rubin, who copied Reagan, lowered it to 20 percent in the late 1990s. As for the spread, in 1986 a Reagan-Democrat compromise reduced that to a healthy zero. Both the long-term capital-gains rate and the top income-tax rate stood at 28 percent. The 1987 stock-market crash followed.

    Why then the continued emphasis on the spread? There’s an old definition of income, known among economists as Haig-Simons, under which wide spreads are viewed as damaging. The Haig-Simons theory finds frequent use nowadays, notwithstanding the 1987 crash. That is because it provides a reasonable pretext for an attack on the rich.

    Burman noted in a conversation earlier this week that lowering the income tax, rather than raising the capital-gains tax, would narrow the spread just as effectively. But cutting the income tax probably isn’t in Speaker Nancy Pelosi’s plans.

    If a capital-gains rate increase alone, however, makes it into 2008 law, the U.S. economy will become less competitive compared with other economies at a crucial time. And if you don’t mind me saying, that’s a spread that can affect a lot of relationships.

    To contact the writer of this column: Amity Shlaes at [email protected] .

  • Regina T

    Richard, I note for the record that you have once again failed to make a moral (or even economic) argument about why capital should be taxed at a lower rate than labor.

    Some people (the rich) have capital to offer. Others (the poor) have labor to offer. Why should one be favored over the other?

    Aren’t we supposed to be an egalitarian society?

    • DMF

      To answer your question. NO we are not an egualitarian society

  • Richard

    Regina,
    Why is this such a mystery to you?
    I am at a loss why you pigeonhole capital, and capital gains, into the hands of the rich only. And it’s not either or. You must first realize how inaccurate that is. Millions of Americans who aren’t rich, use their after tax labor eaned dollars to invest and then get stung by capital gains tax when they sell. It ends up being a disincentive to selling and reinvesting which further stiffles the movement of money to, from and between the middle and lower labor income earners. That’s not good. Especially for those limited labor income earners attempting to be prudent and invest to better themselves.

    We all benefit with more movement of capital, INCLUDING government coffers to fund ALL those many government tasks.

    I get the feeling that you just can’t stand the genuinely rich doing the same thing only at their level. Sort of a “Oh they already have enough, can’t we stop them from making more?” Or “if they’re going to make even more we’re going to stick it to them”.

    There are many rich people who work hard, labor, and invest to make more and better themselves. I’m not one of them but I suspect you would consider me rich simply because I have net worth, or capital investments.
    Like many other people, I worked [in construction] for years, paid taxes and managed to buy some real estate. I have a few rentals. I still work full time in construction. So I labor. When I sell a piece of real estate I will get dinged big time so I wait. Many not rich, working families hold investments because of the capital gains.
    There is no doubt this is has stiffling effect on those family’s economies as well as on the same economy shared by the RICH. Every time a working family sells an investentment, spends a little on a car, appliance, or upgrades their residence, and reinvests the rest we all benefit. The employees building the cars, appliances and homes as well as the “rich” factory owners and dealers.

    Now you explain to me the moral justification for capital gains punishing everyone.
    Our great country, and everyone in it would be much better off without it.

  • Jerry

    I don’t think Regina ever took an ecomomics class or a math class. Quite obviously, she doesn’t pay much in taxes herself or she would understand this argument.

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