The big debate from the politicians is whether they should allow the Bush tax cuts to expire. Right now, the United States and most of the world is still trying to recover from the worst recession in the past 100 years. What better way is there to stimulate the economy than to cut the short term capital gains rate? Many people that are struggling in the United States can’t afford to hold a stock or an investment for more than a year to even qualify for a long term capital gain or Bush tax cut. They would much rather take a risk in the near term and have a smaller tax bill for that gain if they are able to even achieve a profit. Think about it, at this time short term capital gains are being taxed as ordinary income. A single person who takes a risk and makes some money gets slammed by income tax on the investment (average 30.0 percent or more). How is this an incentive to invest in the near term?
Many people that are willing to take on risk need their money now in order to do it again. For example, the real estate market has been coming back a little recently. There are many people that used to flip homes. In other words, they would buy a property, fix it up and then try to sell it for a profit. This type of venture requires a lot risk . A person who does this for a living or as a secondary income really never knows what type of problems they would encounter until they really examine the home closely. These people buy supplies from stores such as Home Depot Inc (NYSE:HD), Lowes Cos Inc (NYSE:LOW), Sherwin Williams Co (NYSE:SHW), Mohawk Industries Inc (NYSE:MHK), and Cemex SAB de CV (ADR) (NYSE:CX) to name a few companies. These home flippers are stimulating the economy right now. Many companies are going to benefit from this type of business activity. This is not the same as some person buying a stock like General Electric Company (NYSE:GE) and holding it for forty years collecting a small dividend. The buy and hold type of investing does very little for the economy, especially in the near term.
Next, the Federal Reserve should allow fed funds rate (overnight lending rate to the four large banks) to be traded and not dictated. As some of you may already know, the fed funds rate is basically zero percent for the four large banks such as J.P. Morgan Chases & Co (NYSE:JPM), Citigroup Inc (NYSE:C), Wells Fargo & Co Inc (NYSE:WFC), and Bank of America Corp (NYSE:BAC). It has been this way since December 2008, and this is the reason why you do not receive much interest on your savings account. The average bank is offering interest of 0.10 percent on a savings account. This is peanuts and it definitely hurts the savers in this country. Why should someone who saves their money be punished because the central bankers are trying to force risk taking on the people? Again, the solution is to simply cut the short term capital gains rate and the people in the country will certainly take on more risk if they see it is beneficial or worth it.