Edward B. Harmon
In 1963 John F. Kennedy wrote, “Capital gains tax directly affects investment decisions, mobility and the flow of venture capital from static to more dynamic situations, the ease or difficulty encountered by new businesses in obtaining capital, and therefore the strength and growth potential of the economy. ”
Was Kennedy right? Yes, in all respects.
President Joe Biden’s proposal to increase the capital gains tax to 43.4% is silly for a number of reasons. Ultimately, it would hurt our economy, hurt our most vulnerable citizens, help China, and increase our deficit. Other than that, it’s a great idea.
The preferential tax rate, which existed under the Liberal and Conservative presidencies, recognizes that all gains are taxed, but that all losses are not deductible and that asset “gains” are not indexed to income. inflation as are other areas of the tax code. It is also a second corporate income tax.
Low rates encourage savings and investment. High rates – as in 43.4% – will reduce investment in new property, plant and equipment and employees.
But, one might say, would that not help to repay the national debt? The answer is no. The Congressional Budget Office estimates the revenue maximization rate for capital gains taxes to be 28%. Others say it is inferior or zero.
Penn Wharton, a non-partisan group often used by Democrats, estimates that doing as Biden suggests would cut federal revenues by $ 33 billion over 10 years. The Tax Foundation estimates the blow at $ 124 billion. How to come? Economists believe the loss to the private side of the economy is growing at a geometric rate as rates rise and taxpayers find ways to lower their tax bill.
Who would suffer from this blatantly and unprecedentedly stupid decision? It won’t be big business, big tech, Wall Street, Hollywood or the NBA. They have the ability to crush smaller competitors who cannot raise prices or absorb losses, and will be able to hire armies of lobbyists, tax accountants and lawyers to create and exploit loopholes.
The first level of victims will be the middle class (because the poor essentially do not pay income taxes), those looking for work, small businesses and their owners and employees, African Americans, Hispanics and young people. Why? They and their future and that of their children depend on investors and bankers who provide investment, venture capital and loans to their businesses and the businesses that employ them, who buy the machines and services they produce, and who hire and promote raises them and opportunities.
It is investor risk capital that will be sharply reduced by Biden’s proposal. This capital finances the thousands of businesses that start up each year and provides them with the money to start what could be the next Tesla, Apple, Intel, Amazon, Wal-Mart or a corner grocery store, nail salon or a restaurant.
Brilliantly designed and executed tax policies answer a few questions. Are taxes changing behavior and is capital mobile? Under President Barack Obama, there was a 35% tax on US corporate profits made abroad and remitted to the United States. Great, said the Liberals, why not have an even higher rate and raise more money?
The facts were that companies responded by moving overseas and taking jobs with them, not returning their profits to the United States. Instead, they invested in factories, factories, and jobs outside of the United States, and the federal government collected almost no taxes. It was a perfect example of “brilliant” liberal economic thinking: raising taxes, hurting American workers and smiling.
President Donald Trump lowered that tax to 15.5%, and liberals and geniuses went into outrage. American companies have responded by bringing money back to America to invest more than $ 1,000 billion. The federal government collected 15.5% of that in taxes. Let’s see, what helps the federal budget the most, 35% of zero or 15.5% of over $ 1,000 billion?
The world is competitive. We are in competition with China. China has a capital gains rate of 20%, and none of the world’s 10 largest economies tax individual capital gains on or near ordinary income. Biden would put American industries and workers at a significant competitive disadvantage compared to China and all of our economic competitors.
Can we really afford more economic insanity from Biden?
Edward B. Harmon is a retired M&A lawyer and law professor who lives in Gainesville and contributes monthly to The Sun.