I’ve never understood the drive by policy-makers to subsidize investment. I can understand subsidizing investment in specific sectors or activities or even regions when there’s a clear public policy purpose. Think transportation, or renewable energy, or hurricane-hit cities. But why investment generally? Why are capital gains taxed at 15% when other income, like wages, taxed […]
I’ve never understood the drive by policy-makers to subsidize investment. I can understand subsidizing investment in specific sectors or activities or even regions when there’s a clear public policy purpose. Think transportation, or renewable energy, or hurricane-hit cities. But why investment generally? Why are capital gains taxed at 15% when other income, like wages, taxed at 28-45% (depending on tax bracket and whether you include social security taxes)? They say it takes money to make money, but should the tax code reinforce that unfair truism? Why should people who have money to invest pay less in taxes than people who only have their labor to contribute?
Leaving aside the raw political power of rich people who benefit, the idea that rationalizes the subsidies for investment is that capital is scarce and that people need to save more. In the US, with a very low consumer savings rate, one might think that capital is rare indeed, what with everyone buying flat-screen TVs and SUVs and generally blowing their paychecks as soon as they can cash them. “A high capital gains tax discourages saving and risk-taking…”, says the economic oracle.
But, in fact, capital is not scarce in the US. And risk-taking is rampant. In the last 15 years, we’ve seen booms and busts all over the place, with investors making insane (in retrospect) gambles. Remember the dot-com boom when investors were falling all over themselves to shovel money to half-baked ideas (pets.com, cosmo.com)? To appeal to these risk-loving investors, Wall Street invented exotic new investment instruments, like securitized home mortgages. A flood of money streamed in and helped build a massive housing bubble.
That went splat and a global financial crisis ensued.
With the rise and fall of the dot.coms, real estate, and the stock market generally, investors are looking for the next thing. Risk is ignored or minimized. Or re-defined. And the next big thing looks to be commodities futures, particularly agricultural commodities.
Except for gold, commodities weren’t viewed as good investment bets in the past. And there weren’t easy ways for investors to directly participate in commodities markets. In addition, regulations limited the ability of pure speculators to get in the agricultural commodities game.
But, through lobbying and inventive financiers, the regulatory and technical limits have crumbled away, and investors of all different kinds are now getting heavily involved. Since agriculture commodities are food, this raises some serious questions about the impact of this investment interest on food security.