Capital gains are unusual in that the taxpayer has the ultimate decision as to whether and when to sell his asset (stock, his business, a work of art, etc.) The higher the tax rate, the less likely he is to sell, seeing as he will only be able to enjoy or reinvest what is left of the proceeds after tax. History has borne this out – capital gains tax collections go down in the periods after increases, and go up in the years after decreases.
The actual impact of raising the capital gains rate by the Obama administration was devastating to the economy. By discouraging the sale of assets, there was reduced capital available for new projects and opportunities, reducing job creation and wages, and resulting in lower revenue collection.
Furthermore, with higher capital gain rates, the expected after tax rate of return on new projects went down, assuring that fewer of them went forward.
Additionally, there were a number of localities, like the state of California and New York City, which have tax rates of 12% or more and also a large concentration of wealthy people and high performing businesses. The Obama federal capital gains increase brought total capital gains rates of more than 37%. A capital gains rate this high virtually brought elective capital to a standstill. This amounted to a rate of almost 60% higher than the rate during the Bush Administration (15%) – when growth and the economy were very strong.
The higher capital gains rate put a stranglehold on risk taking and available capital. Why sell an asset to fund further investment and opportunity when the government takes a large share of the gain with the loss remaining all yours? It makes virtually no economic sense to do so, and the result meant an already anemic economy continued to struggle. Lowering the capital gains rate as part of the Trump Tax Reform package is a positive game-changer for the economy.
