The proposal to impose a 5 percent tax on capital gains earned by New Hampshire residents is bad tax policy that threatens to undermine our state's opportunity to create jobs for our citizens and to lead New England out of the economic crisis.

Capital gains tax proponents, including the Monitor ("For fairness's sake, tax estates, capital gains," editorial, April 7), contend that the burden of the tax is borne by "high rollers who win big in the stock market." Based on this offhand analysis, they argue that the capital gains tax is a progressive tax that is borne by the wealthy.

They are wrong. In today's mobile economy, the true economic burden of a capital gains tax is borne by people who lose job opportunities when entrepreneurial capital flows out of a high-tax jurisdiction into a low-tax one.

Capital gain is earned when a person invests in an asset and later sells the asset at a higher value. The difference between the amount invested and the amount received from the sale is a "capital gain." As an example, if a person invests in a partnership that develops a successful renewable energy project that employs 10 people in Berlin, and then sells her partnership interest at a profit, the investor will realize a capital gain.

Capital gain is also earned by people who create a capital asset. For example, if a person creates a new internet business (say, selling baby furniture over a website that employs seven people in Concord), and then sells the business to some larger firm, the increased value due to the investment of "sweat equity" is capital gain.

New Hampshire's capacity over the next decade to provide a good economy with good jobs for its citizens will depend on its ability to attract capital from people who are willing to take risks to create new businesses and jobs. And make no mistake about it, decisions by entrepreneurs to invest capital are always made on an "after-tax" basis, and are therefore highly sensitive to tax differences among jurisdictions.

Without question (at least before Wednesday, when the House voted in favor of a capital gains tax), New Hampshire's top competitive advantage compared with other states is in the market for entrepreneurs. We offer these job-creating agents a range of important benefits: access to an educated labor force; a good public school system for their children and their employees' children; no sales or use tax on items purchased by the business; no income tax on wages paid to workers; and no capital gains tax if the business is successful. In effect, just miles north of Boston, we offer a highly competitive "product" to attract entrepreneurial capital and jobs from larger economic centers.

Understanding the capital gains tax within this competitive context should cause its proponents to reconsider some long-held tax policy misperceptions. Fifty years ago, before the forces of a free-flowing global capital market were truly unleashed, some economists viewed a tax on business capital as a progressive tax, because it was borne by capital, not labor. But under a modern "open economy" view, most economists now contend that domestic workers, not domestic capital, bear the long-run burden of a tax on capital due to the ability of capital to move across borders much more freely than in past years.

In 1959, John F. Kennedy looked to the Chinese language for guidance on what to do in a crisis. He said: "The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger, but recognize the opportunity."

Today's economic crisis is placing unique short-term pressures on government budgets. However, our hard-working elected officials must remember that this crisis presents an unprecedented opportunity to send a message that New Hampshire provides the best place in New England to create new businesses and new jobs. A capital gains tax would destroy that opportunity, and the long-term effects would be suffered not by some elusive "high rollers," but rather by our children and grandchildren who must move away to find good jobs. (next page »)