Larry's Lectern by Larry Gilbert Issue #3
Larry's Lectern
by Larry Gilbert
Past Issues

The Wonderful World of the Capital Gains Tax

The Tax Laws of the United States include special provisions for foreign investors. Foreign investors do not have to pay any Capital Gains tax to the United States on investment profits in the United States. The United States is the only industrialized country that does not tax foreigners on their investment profits.

This has a wonderful consequence. We have a serious balance of payments deficit, but the potential economic disaster is avoided by this law. Because of this tax law, foreign investors prefer to invest in the United States, rather than in their own country. Much of the “balance of payments” money that flows out to foreign individuals and corporations is returned to the United States in the form of investments in our stock market as well as new business ventures--everything from factories to resorts. It is obvious that foreign investment is a major engine of our economic success.

One can track the flow of foreign money into and out of our Country by watching the dollar’s exchange rate. When the value of the dollar is going up, it is due to foreigners buying US dollars to make investments in the US. That portends well for our stock market and economy. (Note the dollar’s value hit an all time low in July. It is now inching up.)

However, US citizens do pay a Capital Gains tax. So there is no special motivation to invest inside the US. In fact, if you go to your favorite financial advisor, you will be told to diversify: Invest in Western Europe, Japan, and Asia. So a significant amount of our money flows out to those countries.

Now make a thought experiment. What would happen if there were no Capital Gains taxes on US citizens for investments made in the US? Many individual investors would stop sending their money abroad (e.g., stop buying stock in Nokia and Hitachi). Some companies with a cash hoard, like Microsoft, might invest their cash exclusive in US companies. Some might even move their factories back to the US. All that domestic investment would be a further engine to get us out of a recession and return us to the “good old days” of 5% annual GDP growth and very low unemployment. The wealth of the nation would grow so enormously that the standard of living would improve for everyone. We could then afford to provide better education, transportation, health care, etc.

Conclusion: Eliminate Capital Gains tax, but just on investments in the US.


To further shield their funds from taxation, foreigners and foreign corporations, legally, open bank accounts in permissive countries such as Switzerland or Grand Cayman. Then investments through these accounts in the United States are shielded from taxation in both the United States and in their own country.

US citizens do have some tax avoidance options. We can legally change our residence, as Barbra Streisand and Michael Jackson have done. They have residence in Aguilla (Eel) Island in the Caribbean. Alternately, US citizens can establish offshore bank accounts, illegally, and avoid taxes on profits in the stock market. The United States will not prosecute them if the account has a (dummy) foreign corporation as the owner of the account. We permit this, as we do not want to stifle this source of domestic investment.

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