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Pete du Pont, Capital Gains Taxes, and China

The late Pete du Pont would not have loved the proposed capital gains tax hikes, and they could take a bite out of your investment profits.


The late Pete du Pont would not have loved the proposed capital gains tax hikes, and they could take a bite out of your investment profits.

Pete du Pont, a successful Republican congressman and two-term governor of Delaware who ran for the GOP presidential nomination in 1988, died on Saturday at his home in Wilmington, Delaware.

I vividly remember meeting him at a 1988 campaign event in my hometown of Milwaukee. He was a fierce and polished advocate of a pro-growth, fiscally conservative, tax-cutting agenda that could not match the incumbent’s advantage of the then-sitting vice president George H.W. Bush.

Like Senator William V. Roth Jr. of Delaware, with whom I later worked, du Pont never saw a tax cut he didn’t like but was equally tough on spending. As governor, he signed into law two income tax cuts, the first in Delaware’s modern history, and a constitutional amendment that limited government spending and future tax increases.

I can imagine what he would have to say about the proposed capital gains tax hikes in the context of U.S.-China rivalry.


Beware the Proposed Capital Gains Tax Hike

Pete du Pont believed that a key to America remaining the world’s leading economy and power is if it treats capital better than any other country, including China. This is because capital always flows to where it can get the best risk-adjusted return. This risk of partial or total loss is always lurking, making even the bravest investor keep their cash in cash or to seek out low-risk, low-return assets such as U.S. Treasury or municipal bonds, or cryptocurrencies.

An investor looking for gains has to assess the probability that a particular investment will increase in value over time, and weigh it against all the risks that may lead to loss. For a publicly traded stock the risks for even a blue-chip company are significant. For a small business or high stakes startup, the risks are off the charts.

For example, a new company may not be able to attract the right talent, develop the right product or service, or raise the required capital. Regulations may abruptly change, another American or foreign competitor might come out of nowhere, or costs might be much higher than anticipated.

When investors are fortunate enough to invest in companies that overcome these risks, they still have to face a capital gains tax penalty. Luckily, if individual investors invest through a Roth IRA account, they can avoid these capital gains taxes. Other investors have no choice but to take into account these “success taxes” before they decide to invest in the first place.

If they lose their investment, they are on their own, but if they are fortunate enough to beat the odds, they have to write a massive check to the IRS. And now we are looking at proposals to nearly double the federal penalties on savings and investment to 43.8%. And if you live in California or New York City, your combined capital gains tax rate will be around 57%.

To the late Mr. du Pont, this tax hike would only help China continue to grow three times faster than America as it has every year over the past two decades. With America’s huge ramp up in debt and spending, the only way to spur high economic growth and high-paying jobs is through significantly more, not less, private investment.

Both parties weren’t always for raising taxes on investment and innovation.

President Kennedy, in a letter to Congress on January 24, 1963, called for reducing the capital gains tax “to provide a freer and fuller flow of capital funds and to achieve a greater equity.” And about 25 years ago, President Clinton signed into law a reduction in the long-term capital gains tax from 28% to 20%.

Pete du Pont fought hard for what he called his conservative “damn right” agenda, but he was courteously combative and gracious in defeat. He knew that the American brand was to pursue revolutionary change and that the political arena was not for the faint-hearted. He ended his presidential campaign with the following statement, which could never be said in Communist China:

“You’ve given me the opportunity of a lifetime. You listened, you considered and you chose. I could not have asked for any more.”

What do you think of the proposed capital gains tax hikes? How is this affecting the way you invest? Tell us your experience in the comments below.


Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.