We had fun ridiculing the idea of suspending the gasoline tax for the summer, but the gas tax holiday was minor mischief compared with the newest idea for dealing with the financial market meltdown: a two year holiday on capital gains taxes.

Lower capital gains tax rates have always held iconic significance for the far right. Advocates [[{"type":"media","view_mode":"default","fid":"133576","attributes":{"class":"media-image","typeof":"foaf:Image","style":""}}]]think that lower rates would stimulate saving and risk-taking and turbo-charge the economy. There's not a shred of credible evidence to support this position. In fact, lower tax rates probably do as much harm as good because they fuel all sorts of unproductive tax shelters.

But even if gains tax cuts were a panacea, a temporary tax holiday would be a disaster in the current circumstances. A temporary tax exemption would stimulate a flood of asset sales. Virtually all directly held corporate stock with gains would be up for sale as would a lot of long-held real estate and many businesses. Prices could free fall.

While it's true that sellers would have enough money to buy back everything on the market, many would use this as an opportunity to rearrange their portfolios. Unless policymakers fix the problems in the real estate market and financial sectors, that almost surely means a flight of capital away from those troubled sectors.

There are other problems with this idea too. For one, most investment dollars aren't affected by individual capital gains taxes. They're held by pension funds, insurers, and foreign investors. The big players would only be affected indirectly to the extent that they could buy the purged assets at fire sale prices. (On the positive side, the dominance of institutional investors in the market limits the damage that could arise from the fire sale.)

And it would give company CEOs an incentive to try to generate short term profits to make their shareholders happy, since extra profits would be tax free for two years. That kind of short-term profit manipulation was a contributor to our current woes. It shouldn't be encouraged.

Most galling, while doing nothing to address the fundamental market problems, it would drain hundreds of billions from Treasury coffers that might otherwise be used for a real solution.

Finally, here's a surprise. 70 percent of the benefits of this dandy proposal would go to taxpayers making over $1 million.

This holiday is a vacation from reality.  The financial crisis, in contrast, is real. Let's get serious!

PS, I forgot to mention the stupidest part of all, from the Curious Capitalist blog:

".. the toxic mortgage securities clogging up bank balance sheets are worth less now than when they were acquired. Meaning that no capital gains tax would be owed on them anyway. If you repealed the tax, banks would have even less incentive to sell them because they wouldn't be able use the losses to offset capital gains elsewhere."