One of the threads in media-covered political discussion over the weekend has been the comparing-and-contrasting of capital gains taxes in McCain’s and Obama’s economic plans. McCain wants to maintain the reduced capital gains tax level (along with the other Bush cuts) to maintain stimulation to the economy. Obama wants to roll back the tax due to stimulation not offsetting the revenue loss. Obama argues that capital gains taxes impact primarily the wealthy, while McCain rebuts that 100 million Americans had capital gains income. Et cetera, so on and so forth.
Parallel to listening to that banter, an old bit of mental gymnastics dusted itself off and resurrected itself in my mind — the question of whether American business suffers from nearsightedness. From a spectator’s point of view, it seems like many investment decisions and corporate operations are geared primarily towards optimizing quarter-end or year-end financials. Yes, some effort is given to planning next year, but beyond that….
When you consider that many of today’s problems seem to be either aggravated by a focus on relatively short-term profits (consider oil-and-grain commodities speculation, or investment in mortgage-backed securities which didn’t look beyond the real-estate bubble), or are challenges with no quick answer (energy and food supply issues, preparing for the risk of climate change, the graying of America, etc.), the emphasis on short-term returns by investors seems to be in conflict with a societal need for longer planning horizons.
So, an idea has occurred to me — if politicians must muck around with capital gains tax, rather than debate maintaining or raising the tax rate, perhaps some thought should be given to altering the division between “short-term” and “long-term” capital gains.
Currently, gains on investments held longer than one year receive preferential treatment over gains on shorter-termed investments. I wonder if shifting that division out to, say, five years, would maintain the incentive to invest, increase tax revenue, and perhaps incent businessmen and investors to put more emphasis on long-term results rather than the chaos and randomness of current-year numbers.