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December 10, 2008 08:58 PM UTC

Let's Cut Cap-Gains Taxes on Auto Investments

  • 8 Comments
  • by: TheDeminator

By JARED POLIS

http://online.wsj.com/article/…

The din of clattering metal echoes through the halls of our capital: panhandlers! Erstwhile captains of the automobile industry, having foregone their Learjets, now don the tattered rags of beggars as they seek congressional approval for a $34 billion bailout of the Big Three automobile companies.

Our United States Congress of lawyers, doctors, diplomats, retired military officers and career politicians — along with their staffs of intelligent young political science majors and MBAs — now finds itself poring over “business plans” submitted this week by Ford, GM and Chrysler. People who have never before in their lives seen — no less implemented — a business plan are now trying to decide if these companies will succeed by means of a “capital infusion” with various imposed preconditions and negotiate what we taxpayers (investors) should be getting for our money. Something is wrong with this picture.

If we as a society place a public premium on “saving” the automobile industry from its default reorganization under Chapter 7 or Chapter 11 bankruptcy — which has been good enough for the steel and airline industries, among others — then a better manner in which to express that premium might be to establish special tax consideration for those who are willing to take on the risk. One way of doing that is to provide an exemption from capital-gains taxation on all debt or equity instruments used in the next six months to invest in the troubled auto makers.

By waiving the future capital-gains tax on all investments in the automobile industry, we enhance the projected return models and therefore the likely occurrence of a privately funded “bailout.” There are turnaround firms and funds, and they are experts at what needs to be done. Tax exemption for gains would certainly get their attention. It also wouldn’t cost taxpayers anything because it only forgoes future government revenues that wouldn’t exist absent this incentive.

At the very least, my constituents in Colorado won’t find themselves as limited partners in a private equity fund run by Congress making speculative investments in flagging automobile manufacturers and who knows what else with their taxpayer money. And Congress can focus on issues more directly related to its core competencies and the necessary role of government, such as how to make training accessible to workers who might be transitioning between industries.

At best, the tax incentive would lead to a far more efficient investment than anything Congress can negotiate. Such a tax incentive could save jobs, make our automobile industry more competitive and viable, and earn tax-free return on capital for the savvy investors who step up. If it works in this particular case to incentivize additional risk-taking through a capital-gains tax exemption, it may indeed work in other cases or, I dare say, across the entire U.S. economy.

Most members of Congress and staffers on the Hill are smart people, but we should not pretend that we are better at what are so clearly other people’s jobs. One of the tremendously difficult tasks that we are ill-equipped to successfully orchestrate is restoring these three failing companies to health. As one of the members of Congress with a strong business background, I know what I don’t know in business. While I hold my colleagues in great esteem, I doubt their abilities as turnaround artists are very much superior to mine. Any pretension of a government bailout being a good deal for taxpayers should be abandoned for the insincere (or perhaps ignorant) rhetoric that it is.

Among the reasons I ran for Congress, one was to make government work. Let’s get government back to doing the work of government. Reading business plans and making investments is the job of equity funds and turnaround specialists, not members of Congress.

Mr. Polis, the founder of proflowers.com and bluemountain.com, was recently elected to Congress as a Democrat from Colorado.

Comments

8 thoughts on “Let’s Cut Cap-Gains Taxes on Auto Investments

  1. If it works in this particular case to incentivize additional risk-taking through a capital-gains tax exemption, it may indeed work in other cases or, I dare say, across the entire U.S. economy.

    Does Polis advocate a cap gains tax holiday here?  That is quite a departure from Obama’s stated goal to increase the capital gains tax by something around 50%.

    While I am not sure how “savvy” new investors in Ford or GM are, even with Jared’s proposed tax exemption, I would like to see a reduction in capital gains tax across the board for long term investments in public and private equity.  

       

    1. …did Obama state a goal of increasing the capital gains tax to around 50%? And don’t provide a link to some right-wing website or pundit who claims he did, show us where Obama or his campaign specifically stated this goal.

        1. He’s has made a good number of announcements about where he thinks the long term capital gains tax should be.  It has been a moving target with this guy, as he has a weak grasp on business and economics and relies heavily on advisors for these matters (not a terrible thing; he is strong in some areas and you cannot expect a guy to be an expert in everything).  

          But he has said 20%, he has said 25%, and some of his advisors have advocated higher rates.  An Obama capital gains tax rate between 20-25 percent is about 50% greater than the current long term rate (15%).

          1. …as long as one also makes it clear he’s never advocated a blanket change in the cap gains rate, only letting the current Bush tax cut expire for those making above the $250,000 household income threshold.

  2. I also like the out of the box thinking, as Fidel calls it, a lot. Great to see someone from Colorado presenting it, too.

    But it’s sort of a hollow proposal in its present form. The common equity of these companies is likely to be so diluted (as it already has been for Ford) as they try to raise additional capital in the next few years that it’s a sucker’s game to buy their common shares, especially if dividends don’t materialize (which they’re unlikely to do in the near future).

    There are some opportunities for capital gains by buying their depressed debt that’s currently trading for less than 20 cents on the dollar in the public markets, but why not ratchet up the idea a few notches and let them use some of their bailout funding to refinance their existing debt — on which they’re paying high junk bond interest rates — into new, government-backed “auto bonds”  on which the interest is tax-free? The FDIC already is doing something similar for the financial giants; why wouldn’t it work for the automakers?

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