If you were asked to design a tax code from scratch, you’d want to make sure that the rules would encourage things like investment and economic growth. After all, the more you do to enlarge the economic pie, the less pain we feel when the government takes out its slice to do the work it needs to do.
Since 1921, the federal tax code has contained a provision — Section 1031 — that does exactly that. It allows taxpayers to roll over their capital gains and defer the taxes on investments in things like real estate, equipment, and vehicles, so long as the savings are rolled directly back into like-kind investments.
It’s important to note that the taxes are deferred, not eliminated. But the deferral helps businesses like farms and construction companies to reinvest and grow, ultimately driving job creation and economic expansion. And that, in turn, generates even more tax revenue in the process.
Repealing Section 1031 would be a short-sighted way to collect more taxes today while choking off economic growth in the future. The government estimates it could collect a little over $40 billion in taxes over ten years by repealing Section 1031, but Ernst and Young estimates that a repeal could cost the economy as much as $3.20 in growth for every $1 in tax revenues raised.
A farmer would dismiss that as “eating the seed corn.” You’d have to be pretty bad at math to give up $3.20 to get $1 in return. Keeping Section 1031 in place ensures investment and economic growth, which we need now more than ever.
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