Many Republican candidates have proposed eliminating the capital gains tax as a means to drive economic growth in the United States. This belief stems from Ronald Reagan's success in the 1980's. However the world has changed significantly since the 1980's and the factors that resulted in success for Reagan no longer exist. In fact, reducing capital gains may result in a net decrease in US job growth. Problem 1) The Portfolio Effect In 1980, US investors had their complete portfolio invested in US stocks and bonds. The leading edge Harvard University Endowment fund allocated 66% to domestic equities and 34% to fixed income. By 2010, the Harvard Endowment fund had shifted it's asset allocation to 11% US equities, 22% Foreign Equity, 12% Private Equity, 23% Real Assets, 15% Fixed Income and 16% Alternative. Harvard's current allocations more closely align to international equities 50% share of global market capitalization. Portfolio investment in developing economies (that is, net purchases of securities by foreigners, typically American and European financial institutions) increased from zero in 1980 to well over $100 billion in 1993 (World Bank, 1999). The Institute of International Finance is projecting further increases in overall net private capital flows to emerging markets this year to more than $1 trillion, following a 54% rise to $990 billion in 2010. However, the average US investor has been slow to move into these markets. According to various market surveys, international equities represent only approximately 11% of the typical institutional plan sponsor portfolio. Reasons for this lag include: the perceived higher risk of emerging markets, higher investment costs and portfolio switching costs. Eliminating the capital gains tax will mitigate many of the barriers and investors should significantly increase their share of international equities. As investors shift 14 to 30% of their portfolio into international equities, US capital markets will tighten near term constraining new investment and job creation. In addition, the deficit will increase as we lose capital gains revenue but fail to gain the investment related revenue. This rising deficit will further squeeze capital markets and hinder US job growth.