Here’s Investor’s Business Daily:
Biden proposes raising the capital gains tax rate to 39.6%, nearly double the current top rate of 20%, for millionaires and billionaires. . . .
If enacted, the new higher cap-gains rate would impact just taxpayers with incomes over $1 million.
Well, that’s good to know! People with incomes below $1 million presumably are not “impacted” if stock prices decline. And I guess workers don’t care if the nation’s physical capital stock gets smaller.
You can argue that these effects might not be large, but it’s crazy to suggest they don’t exist at all. Stocks fell on Biden’s announcement, despite the fact that it’s unlikely the proposal goes through Congress without being watered down.
Biden’s proposal would push the top capital gains rate in the US to over 50% (including state taxes). Biden should learn from Sweden where the top rate is 30%, roughly the same as the current US top rate. Even better, emulate one of the developed economies with no capital gains tax at all (at least for passive investors).
READER COMMENTS
Thomas Lee Hutcheson
Apr 30 2021 at 6:46am
Why not focus on uses of income, not it’s source? Looking backward, the damage from taxing income rather than consumption in the past, when the investment producing today’s capital gain was taxed, is done.
Rather tax consumption progressively. Financing SS, Medicare, and unemployment insurance with a VAT rather than taxes on wages would be a good start. Eliminating the regressive subsidization of mortgage interest, SALT, and charitable contributions by changing the subsidy from a deduction on income to a partial tax credit, would be another. Raising limits on 401K type investments would be another. Imputing corporate taxes to US taxpayers as credits against personal “income” tax would be still another.
Arguing about taxing sources of income rather than uses is just confusing.
Michael
Apr 30 2021 at 6:50am
Years ago, when asked about it by Tyler Cown, Larry Summers criticized the concept that taxing capital amounted to taxation of future consumption.
https://medium.com/conversations-with-tyler/tyler-cowen-larry-summers-blog-secular-stagnation-twitter-421a69ed84c8
AMT
Apr 30 2021 at 6:08pm
Excellent point, thanks for sharing that link.
Scott Sumner
Apr 30 2021 at 8:44pm
Notice that Summers disagrees with Biden’s claim that cap gains should be taxed at the same rate as wage income.
Philo
May 1 2021 at 3:50pm
Re Summers: the fact that some capital income is unrealized, and therefore untaxed, is hardly an argument for taxing realized capital income.
Philo
May 1 2021 at 3:53pm
As for rents: what does he have in mind? Are the gains of the average small investor in the stock market partly rents? How about the gains of the entrepreneur who starts a successful business?
Zeke5123
Apr 30 2021 at 7:54am
There is a really interesting slight of hand by the Biden administration.
On one hand, Biden is claiming that the capital gains rate won’t have too much of an impact on the market because it only affects a very small number of people.
On the other hand, Biden claims that we need to enact this capital gains tax in part because the wealthy have accumulated massive amounts of wealth.
Those two positions are mutual inconsistent so what way is it Biden?
Thomas Lee Hutcheson
Apr 30 2021 at 9:38am
Those seem perfectly consistent (true or not is a separate issue) if a very small number of people have accumulated great wealth through preferentially taxes capital gains.
zeke5123
Apr 30 2021 at 2:45pm
No — if those small number of people with massive amounts of wealth are highly sensitive to capital gains rate changes, then by changing the rates you will have a large impact on capital markets.
You can’t say the the change in capital gains rates won’t have an impact on the market because it only impacts a few people while simultaneously believing that those people hold most of the value in the market.
Thomas Lee Hutcheson
Apr 30 2021 at 4:32pm
And why might not these few people be relatively insensitive to the change in rates?
Matthias
May 1 2021 at 5:08am
Well, foreigners don’t pay American capital gains tax when holding American assets.
robc
May 1 2021 at 9:09am
When foreigners own them, they aren’t American assets.
Jose Pablo
May 2 2021 at 10:20am
Well, American pay capital gains taxes when selling (sometines even while “holding”) “foreign” assets
So what?
MarkW
Apr 30 2021 at 9:25am
When are Democrats going to wake up to what a poison pill these proposals would be for high-tax blue states?
If federal capital gains are 20% and state capital gains are 13%, then if you have $10M in capital gains, you keep $8M in Texas and $6.7M in California, meaning your after-tax income is 22% higher in Texas. If you boost the federal rate to 40%, then after tax income is $6M in Texas and $4.7M in California. At that point, the after-tax income is now 28% higher in Texas than California, without any change in the tax rates in CA and TX. The more the feds take, the harder the hit from high state tax rates and the greater the incentive for higher earners to make the move.
Garrett
Apr 30 2021 at 10:49am
Sounds like this will increase the proportion of Northeasterner retirees who move south
Larry
May 2 2021 at 6:48pm
I am eagerly waiting for capital gains nonsense part 3.
Where you recognize that Biden’s proposals are inadequate to fix the capital gains problems, like stock options for CEOs, like stepped up basis for heirs, like the carried interest loophole.
And, of course, when you realize that retail stock investors are just like horse race bettors.
The problem is not really with Biden’s proposals. It is that Biden’s proposals do not go far enough to make capital gain investments and tax fair and not a boon to the already rich.
But I doubt that you will ever understand that.
Phil H
May 2 2021 at 9:41pm
As a matter of language, this criticism is a bit off base. I think we all know that policy can have knock-on effects. It’s pretty normal for a newspaper to do an analysis that reports firstly on what the direct effects of a policy are. Saying, “This policy affects only importers of caramel products” is not meant to imply that no-one else will ever be affected; it is just a statement about the scope of the policy as written.
Your point that this kind of policy change can have very significant indirect effects is fine. I just don’t think it’s right to call this very normal piece of journalistic writing “nonsense.”
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