How higher capital gains taxes protects economy

In his Jan. 23 letter pointing out that the low tax rate on capital gains steers money into investment, Richard Levy missed a clear lesson of the past three years regarding the financial crisis and its aftereffects.

The news has been full of stories about how so much capital was brought into the United States by those wanting to invest in market bubbles. Soon, there was too much capital. “Capitalists” invented new places for investors to invest it, such as mortgage-based derivatives and collateralized debt obligations, that were not necessarily of substantial social value.

As Mr. Levy implied, low tax rates attracted some of that excess capital. The tax breaks for capital gains that he justified fostered not only financial collapse brought on by the bursting bubble but greatly increased inequality of wealth distribution and diversion of capital into relatively unproductive assets.

Taxing capital gains at a higher relative rate than currently legislated thus also has a business justification: preventing this buildup of excess capital.

Charles Murn, Washington