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bullish expectations continue. In this case the speculators form a chain each of 
them trusting in a continuation of the boom until finally at one point the 
underlying real determinants set a limit to the hausse: As already mentioned the 
share prices or the land values become unrealistic because the yield in form of 
dividend or earning power will be insufficient to maintain the belief in a 
continuation of the boom, and this will be sufficient to lead to its breaking. 
Thus the large element of irrationality which is necessarily implied in the 
expectations leads to instability of asset prices, possibly with effects on the 
"real" economy. 
X. CAPITAL GAINS TAX. 
In the United States capital gains are now taxed at the same rate as income. 
There is a very strong current of political pressure in favor of a reduction or 
abolition of the capital gains tax. The argument in favor of that is never very 
deary put, but it is maintained that it would reduce the cost of capital. 
Apparently the idea is that the recipient of capital gains would invest in bonds 
and thereby lower interest. It is not considered that the recipient of the gain 
might use it to continue the game of inflating asset prices, in fact that a 
substantial gain will tend to encourage him to do that, and therefore to 
increase the instability. From this point of view a taxing of capital gains 
could be recommended as a way of reducing instability. The argument of the 
opponents of the tax, incidentally, does not take into account that the tax 
prima facie would reduce the budget deficit and therefore the borrowing of the 
government. 
Some of the opponents of the capital gains tax might have a more sophisticated 
argument in mind: the tax might make it more difficult to sell new shares 
especially if it is the case of a firm which does not belong to the small set of 
very well established large corporations. The idea is that those who take up 
newly issued shares of a new high tec concern will often have to base themselves 
not on actual returns which are still modest but on the promise of large returns 
in the future. In other word the chances of new corporations are thought to be 
based on investors which are to some extent speculative. This argument is less 
shaky than the earlier one but it concerns only a very limited field and is 
therefore weak in comparison to the more general argument that capital gains 
favor instability over a very wide field.