When Biden was a candidate, one of his proposals was to raise the capital gains tax (which also applies to dividends) to 39.6%. When I wrote about it at the time, it sounded completely outrageous that any serious candidate for President of the United States would willfully consider implementing such a devastating levy. We had already experienced the negative effects of Obama’s 23.8% tax on capital gains which contributed to the sluggish economic recovery during the Obama administration, and his Vice President now wanted to raise the capital gains rate even higher?
Unfortunately, Biden’s plan has been introduced and may be coming to fruition. This week he indeed announced a new 39.6% capital gains rate (43.4% including the Obamacare add-on), which nearly doubles the current effective rate of 20% (23.8% including the Obamacare add-on).
Yet that’s not the worst of it. Some states with a large concentration of wealthy people and high performing businesses, such as California and New York have recently raised taxes, so taxpayers in those localities will pay much more. The absolute worst area would be NYC; after factoring in local taxes as well as the recent state tax increase, high income earners would face a rate of 57%!
Remember, Economics 1a teaches that when you tax something you get less of it. Taxing investments this way guarantees that investment – economic growth and GDP – will decrease.
Furthermore, this increase is outrageous as a matter of equity and fairness. Taxation of dividends and capital gains is a second tax on the same income – having already been taxed at the corporate level. No other major country double taxes this income. That is the reason dividends and capital gains are taxed at a lower level now – and they should be reduced, not doubled.
Furthermore, raising taxes on capital gains does nothing to raise revenue. Because people have discretion as to whether or when to sell assets, higher capital gains rates invariably lead to lower tax collections! Furthermore, it discourages the sale of less productive assets thereby reducing investment opportunities and economic growth. Even President Obama acknowledged that higher capital gains taxes won’t raise revenue – he was forced to admit that his irrational, hypocritical and wrongheaded rationale was to promote “fairness”!
A massive capital gains tax such as the one proposed by Biden will be inequitable, destructive, and clearly detrimental to our economy and the very people Biden states he is intending to help.