The Dumbest Tax Increase – WSJ

If you need more evidence that ideology, more than common sense, is driving the Biden presidency, look no further than your trial balloon to raise the top capital gains tax rate to 43.4%. It is the stupidest way to collect taxes for many reasons, not least because it will cost government revenues.

The prerequisite for the tax increase is that a preferred tax rate for long-term capital gains is an unjustified loophole. (Gains from assets held for less than a year are taxed at the individual income rate.) However, this preferential rate has existed for decades through Democratic and Republican administrations. The current maximum rate is 23.8%, including an ObamaCare surcharge of 3.8%. Even in the economically irrational 1970s, the highest rate of return on capital never exceeded 40%, as the graph opposite shows.


There are good economic and fair reasons for the preferential rate. First, under current tax rules, all gains on investments are fully taxed, but all losses are not fully deductible. Losses can offset profits in a given year, but losses in excess of profits can only be offset against personal income up to $ 3,000. The preferred rate compensates for this asymmetry.

Second, increases in value are not adjusted for inflation, so investors who hold assets for a longer period of time pay taxes on increases that are sometimes illusory. Other parts of the tax code, including income tax brackets, are indexed for inflation, but not for capital gains, which arguably need them most, as assets are often held for decades.

Third, a capital gains tax is a second tax on corporate income. A neutral income code would only tax all income once. However, the US also tax corporate profits when they are earned, and President Biden wants to increase that tax rate by a third (from 21% to 28%). If a company pays out after-tax earnings in dividends, or an investor sells stocks that have risen in value due to higher profits, the income is taxed a second time.

No less progressive than the Democratic MP Jerry Nadler

recently regretted the injustice of “double taxation” on state and local tax deduction, although he probably had no idea he was making a principle that truly applies to corporate income and capital gains.

The main reason for taxing capital investments at low rates is to encourage savings and investment. Consumption – buying a car or yacht – is subject to sales tax, but not federal tax. But if someone saves income and invests in the family business or in stocks, they are beaten with another tax round. Control a little more and you get less of it. Control capital income more and get less investment, which means less investment to improve labor productivity and therefore lower income gains over time.

A former US president once put it this way: “The tax on capital gains has a direct impact on investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty of new companies in raising capital and thus their strength Economic growth potential. ”

It wasn’t Ronald Reagan. It was John F. Kennedy, whose chief economic adviser was the liberal Keynesian Walter Heller. A Democrat who said there would be excommunication today, but it’s true nonetheless.

The progressives’ last resort is that increasing capital gains tax will increase revenue. They are wrong in that too. As former Federal Reserve Governor Larry Lindsey explains nearby, a federal rate of 43.4% costs the government money. The Congressional Budget Office states that the revenue maximization rate for capital gains is approximately 28%. Other economists say it is lower, and many think the ideal rate is zero. No one outside of the fever swamps believes it’s more than 40%, let alone the 55% or more that would apply in high-tax countries if the Biden proposal became law.

The history of capital gains taxes confirms this. Selling an asset is usually at your own discretion so that investors can decide when to realize a gain or loss. As interest rates rise, Americans tend to hold onto their wealth longer, which reduces realizations. CBO has determined that for every 1% increase in the Capital Earning Rate, there is a 1.2% decrease in realizations. Increase the tax as much as Mr. Biden wishes and the realizations will decrease significantly. The higher rate costs the state revenue.


So why raise a tax rate that lowers investment, lowers wage growth, and lowers government revenue? Temporary economic insanity is one possible explanation.

Mr. Lindsey suggests another: punishment for its own sake. Without a rational basis for the tax hike, this sounds right. This is what happens when you hand over your economic policy to Bernie Sanders and Elizabeth Warren. Envy is in the political saddle, and Joe Biden is on his way.

Journal Editorial Report: Prospects for Laws to Reform Lawsuits. Image: Spencer Platt / Getty Images

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