The problem with investment in America and capital gains income is that investment is by and large an activity of the wealthy. Our system has been designed in such a way that the wealthy benefit more from investing and they can more easily invest. It should be no surprise then that 73% of all capital gains income goes to the top 20% of wealthiest Americans. It should also be no surprise that capital gains account for 28% of that segment's income. The bottom 60% of Americans only receive about 14% of America's total capital gains income.
This creates a dilemma in the American system because as companies move to become more efficient and cost effective they often do so by eliminating the need for manual labor, which then in turn increases capital gains for the wealthy, while at the same time putting the working class people out of a job, again increasing the polarity where the rich get richer and the poor poorer, which then in turn increases the need for government assistance for the poor, because private industry is eliminating the need for labor. However, we don't want to stop the private industry from becoming more efficient, so what do we do?
The solution is a fundamental change of the American investment system. Right now the American investment system is only amplifying global economic problems and domestic economic problems because it is so disproportionately favorable to the wealthy. This only amplifies economic disparity and ultimately undermines the economy adding to the fluctuations in our economic system.
There are many possible ways to change the system which all need to be explored. The socialist revolution was based on the idea of workers taking control of he means of production. The motivations for these actions were well founded, but the mechanism for doing so has only proven to be detrimental and self-defeating.
They key to human progress and a fair economy is not workers controlling production, it is a greater sharing of the fruits of production in a way that still promotes progress.
One way that this could be achieved would be though a national investment system similar to the concept of Social Security where a flat tax similar to the FICA tax is used and that money is invested in American companies in a federally managed portfolio. Each workers would receive shares in that portfolio based only on the number of hours worked. This means that someone making $5. 00 and hour and working 60 hours a week would get more than someone making $500 an hour and working 30 hours a week.
In this way people would be compensated by how hard they work. By using a FICA type system redistribution of wealth would occur whereby the wealthy would receive a smaller return than what they put in and the poor would receive a larger return than what thy put in, similar to the way Social Security works. This would serve to actually stabilize the economy and provide a second means on income for poor and middle class Americans which would be funded by private industry, not the government. This would also increase investment in private industry. At the same time it would create a situation that would alleviate strain on the economy due to the elimination of jobs through mechanization and computerization, and even from jobs going over seas, because a broader range of people would receive benefits from increases in efficiency, not just the wealthy.
Ultimately this will build a stronger economy that benefits everyone at all levels, from the richest to the poorest, and it will reduce the need for welfare programs. Individuals would be able to choose to reinvest the dividend income back into their portfolio or to receive it as income. Individuals would also be allowed to sell their shares. Perhaps regulations would be needed, such as not allowing the sale of shares until an individual has been invested in the system for at least 5 years or something of that nature.
I believe that it will require a plan like to this to really bring investing to the masses and that bringing investing to the masses is essential for long-term economic prosperity and growth in ways that can satisfy American demands without requiring the expansion of foreign investments, yet still allowing for the expansion of foreign investment in healthy ways.
For further details on this see:
Understanding Capitalism Part I: Capital and Society