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From Branches to Booms

A Bold Vision for Capital Gains Tax Reform

The past week delivered a stark reminder that markets are still groping for solid ground. Gold, after climbing toward $5,300 an ounce in a frenzy of inflation-hedge buying, cratered to around $4,890-a 10% wipeout in a matter of days. Silver suffered far worse, plunging roughly 35% from peaks above $130. Bitcoin tested $78,000 after teasing six figures, Ethereum followed suit, and equities took their lumps too: the Russell 2000 shed more than 7%, Nasdaq proxies dropped 4–5%, and the broader indices followed in lockstep. One widely shared thread on X captured the carnage with dark humor: “a crash by day of the week,” as small-caps bled Monday, the dollar strengthened Tuesday, growth stocks stumbled mid-week, precious metals got hammered Friday, and crypto capped the rout over the weekend.

This wasn’t a black-swan event. It was the inevitable exhale after an extended liquidity-fueled rally. The Fed’s three rate cuts since September 2024 (175 basis points total) had loosened financial conditions dramatically-pushing the Goldman Sachs US Financial Conditions Index to its easiest level since early 2022. A weaker dollar, razor-thin credit spreads, and risk-on euphoria bid up everything from bullion to blockchain. Then reality intervened: the January 28 FOMC decision to hold the target range at 3.5–3.75%, Kevin Warsh’s nomination to chair the Fed signaling a more rules-based, less dovish regime, and the looming cross-currents of Trump-era tariffs and fiscal policy. Thin weekend liquidity turned corrections into routs, leveraged positions were forcibly unwound, and once-revered “debasement trades” suddenly behaved like high-beta speculations.

Markets are searching for stability, but they’re not finding it. Volatility spikes, forced liquidations, and sentiment swings from greed to fear in hours. In such an environment, good policy should provide anchors-predictable rules that let capital find its true equilibrium through voluntary exchange rather than policy zigzags or central-bank guesswork. Instead, Washington continues to tinker at the margins of our tax code while preserving one of the most distortionary, complex, and growth-killing features: the graduated, multi-layered capital gains tax structure.

It is time to tear it down to the boards.

Income Is Fruit, Capital Gains Are New Branches

Let me offer a simple analogy that has served me well in conversations and columns: ordinary income is the ripe fruit you harvest from the tree each season. You pick the apples, eat them (or sell them to pay bills), and the tree remains standing to bear more fruit next year. Tax that fruit if you wish-government can take a portion of current output-but leave the productive structure intact.

Capital gains are different. They are the new branches growing on the tree. Those branches represent structural improvement: the tree grows taller, limbs spread wider, leaves multiply, roots deepen. That incremental growth is what enables larger, healthier fruit harvests in the future. When policymakers impose high or graduated taxes on capital gains, they are effectively pruning those new branches-cutting away the very extensions that would support greater abundance tomorrow.

Consider a real-world example: a Plano entrepreneur builds a small tech firm over a decade, reinvesting every dollar of profit. The business appreciates significantly. When she finally sells to fund retirement or launch the next venture, the government takes up to 23.8% of the gain. That tax doesn’t just reduce her nest egg; it reduces the capital available to seed the next generation of startups. Multiply that story across millions of savers, investors, and founders, and you see why high gains taxes slow the engine of prosperity.

The current federal long-term capital gains rate structure (for assets held over one year) is 0% up to roughly $49,450 of taxable income for singles in 2026, 15% up to about $545,500, and 20% beyond that. Layer on the 3.8% Net Investment Income Tax (NIIT) for modified adjusted gross income above unindexed thresholds ($200,000 single, $250,000 joint), and the effective top rate reaches 23.8%. Short-term gains are taxed at ordinary income rates up to 37%. Then come the exclusions, deferrals, and special rules: $250,000/$500,000 exclusion on primary-home sales, Qualified Small Business Stock (QSBS) breaks, Opportunity Zone deferrals, and a host of sector-specific tweaks.

This isn’t simplification; it’s a compliance labyrinth that creates powerful perverse incentives. Bracket cliffs encourage “lock-in”: investors refuse to sell appreciated assets to avoid jumping from 15% to 20% or triggering the NIIT, trapping capital in outdated stocks, aging real estate, or legacy businesses. That locked capital cannot flow to higher-productivity uses-new factories, startups, or disruptive technologies. The economy grows more slowly than it should.

Austrian economists-Mises and Hayek foremost-would call this a textbook distortion of price signals. Interest rates and taxes coordinate intertemporal choices: how much to consume today versus save and invest for tomorrow. When gains taxes are high or uncertain, people shorten time horizons, bias toward consumption over capital formation, and accept shallower, less productive production structures. The result is fewer roundabout methods of production (fewer machines, less R&D, slower innovation), lower real wages, and diminished living standards over the long run.

Joseph Schumpeter, whose concept of creative destruction has long captivated me, would see the graduated capital gains tax as a brake on progress. High or tiered taxes shield incumbents-large portfolios and established firms hoard assets, avoiding realizations that would free capital for challengers. The gale of creative destruction weakens: old, inefficient structures linger, innovative newcomers struggle for funding. Flatten the tax, lower the rate (or eliminate it), and the gale blows with full force. Capital reallocates rapidly from legacy uses to breakthrough opportunities-AI infrastructure, domestic manufacturing revival under tariffs, entrepreneurial ventures in places like Plano. Destruction clears space; creation rushes in. The economy doesn’t just recover-it renews itself with vigor.

Tax Cuts Don’t Cause Deficits-Spending Does

The predictable objection is that flattening capital gains taxes would “explode the deficit” or deliver an unearned windfall to the wealthy. Let’s dispose of this quickly and clearly: tax cuts do not cause deficits. Spending does.

A deficit is nothing more exotic than outlays exceeding revenues. If a tax reduction lowers inflows and Congress chooses not to cut spending-or worse, increases it-the red ink grows because of the spending decision, not because taxpayers retain more of their earnings.

Recent history illustrates the point vividly. The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, permanently extended most TCJA individual and business provisions, eliminated taxes on overtime pay and tips, introduced a senior deduction, and boosted standard deductions. Fiscal scolds immediately warned of trillions in added debt. Yet federal outlays continue to climb as a share of GDP, propelled by entitlement growth (Social Security, Medicare, Medicaid) and interest payments on the national debt that now rival defense spending. The Republican Study Committee’s “Making the American Dream Affordable Again” framework identifies more than $1.6 trillion in potential cuts to duplicative, wasteful, or ideologically driven programs-everything from redundant federal agencies to poorly targeted subsidies. Pair genuine spending restraint with tax reform, and the arithmetic improves dramatically.

Moreover, lower capital gains taxes historically trigger a surge in realizations. People sell locked-in assets, pay the reduced rate, and reinvest the proceeds. That activity often boosts short-term revenue collections (the Laffer curve is not theoretical; the 1997 reduction from 28% to 20% produced exactly this pattern, with realizations jumping and revenues rising). Even when static scoring shows a revenue shortfall, the dynamic growth effects-higher investment, productivity, and wages-frequently offset a substantial portion. The real fiscal question is not “how much revenue do we maximize?” but “how do we create the conditions for the broadest, most sustainable prosperity?” Spending restraint answers the former; capital-gains reform answers the latter.

The Guaranteed Benefit: Certainty in a Lower Cost of Capital

Debates over dynamic scoring, inequality, or “fairness” will rage on. But one outcome of flattening the capital gains tax structure is as close to guaranteed as anything in economic policy: rock-solid certainty that the cost of capital is lower and predictable.

The existing system is riddled with uncertainty. Bracket thresholds shift with inflation (or fail to, in the case of NIIT triggers that haven’t been adjusted since 2013). Holding-period rules distinguish short-term from long-term treatment. Phase-outs, exclusions, and deferral programs change with legislation or administrative whim. Investors and entrepreneurs must constantly hedge against policy surprises-retroactive changes, expirations, or new surtaxes. That uncertainty raises the effective hurdle rate for every long-term project, making bold commitments riskier than they need to be.

Replace the mess with one uniform, low rate-say 10–15%, or ideally zero on non-speculative realized gains-applied equally regardless of holding period, income level, or asset type. Fully repeal the 3.8% NIIT so dividends, interest, rents, and passive income are no longer subject to the stealth layer. Eliminate carve-outs, deferrals, and special preferences that favor certain assets or constituencies over others. One rule, one rate, no cliffs, no creep.

The payoff is immediate and structural. Investors know with certainty what portion of any future gain they will keep-no bracket-jump anxiety, no NIIT threshold worries, no lock-in forcing them to hold forever. Capital flows more freely to its highest-valued uses: businesses fund expansions, families sell homes without punitive traps, founders exit ventures and seed the next cycle of innovation. In a week like the one we just endured-when fear ruled and stability felt elusive-that kind of predictability is an anchor. Markets can discover genuine equilibrium through voluntary exchange rather than reacting to the latest policy rumor or Fed whisper.

The Prescription: Flatten It in the Next Reconciliation Push

The legislative window is open. OBBBA secured the TCJA foundation. A second reconciliation bill-potentially building on RSC proposals for home-sale exclusions, estate-tax repeal, and gain indexing-can go much further. Don’t nibble at the edges. Tear the structure down.

  • Repeal the Net Investment Income Tax entirely.
  • Merge short-term and long-term treatment into one uniform rate.
  • Set that rate low (10–15%) or eliminate it on gains from productive assets (business sales, investment in new enterprises).
  • Eliminate special exclusions, deferrals, and preferences that favor certain assets or constituencies over others.
  • Pair the reform with aggressive spending cuts to ensure fiscal discipline.

Why act now? Markets are volatile. The Warsh Fed nomination points toward tighter, more predictable monetary policy. Tariffs introduce supply-side uncertainty. AI and manufacturing tailwinds are real but require capital to flow freely. Certainty in a lower cost of capital stabilizes expectations, encourages long-horizon commitments, and lets genuine Schumpeterian forces work: inefficient uses are cleared out, innovative ones are funded, progress accelerates.

Congress should hear a clear message: tear it down. Spending causes deficits. Let capital breathe.

A Tree That Feeds the Future

In uncertain times, policymakers should not add more fog-they should deliver anchors. Flattening the capital gains tax structure is the most reliable anchor available: lower, predictable costs of capital; unlocked savings and investment; genuine, broad-based growth instead of government dependence.

Protect the new branches. Let the tree grow taller. Tomorrow’s fruit will be larger, sweeter, and more plentiful for everyone.

Texas style: build it right the first time, then let it stand tall.

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James K. Bishop

James K. Bishop is a conservative writer and raconteur hailing from Texas, known for his incisive and often provocative takes on political and cultural issues. With a staunch commitment to originalist constitutional principles, he emphasizes limited government, individual liberties, and traditional American values. Active on X under the handle @James_K_Bishop, he frequently engages his audience with sharp critiques of progressive policies, media narratives, and overreaches by the federal government. His style is direct, often laced with humor and wit, which resonates strongly with his conservative followers.