Saturday, September 22, 2012
WSJ: Obama's 100% Capital Gains Tax Increase Won't Raise Revenue, But Will Hurt Economy, Jobs & Wages
Wall Street Journal editorial: A Capital Gains Primer: Why a Tax Rate Differential Is Fair and Helps the Economy:
On Thursday the House Ways and Means and Senate Finance committees held a rare joint hearing on taxing capital gains in the context of tax reform. The timing couldn't be better because President Obama recently restated his support for lifting the top capital gains tax rate next year on those with earnings above $250,000 to 23.8%, or almost 60% above today's 15% rate. If Mr. Obama's Buffett Rule is also adopted, the rate would rise to 30% for those earning $1 million—the highest rate since the late 1970s.
The question is to what purpose? This won't raise much if any revenue for the government (see Obama's Revenue Soup, April 9, 2012). But it will impose a big cost on the economy. ...
The current Democratic obsession with raising the capital gains tax comes from a mistaken belief that the preferential rate applied to the sale of a family business, farm or financial asset is a "loophole" that mainly benefits the rich.
But that ignores the vital link between tax rates and capital investment. The lower the tax, the greater the incentive to take risks. ...Thanks to rate reductions in 1978, 1981, 1997 and 2003 (see chart), the statutory capital gains tax has fallen to 15% from about 40%. These rate cuts unleashed historic levels of venture-capital funding for business start-ups. ...
Far from being a loophole, the low tax rate applied to capital gains is beneficial and fair for several reasons.
First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses.
Second, capital gains aren't adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. It's therefore possible for investors to pay a tax on "gains" that are illusory, which is another reason for the lower tax rate.
Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. ...
The main reason to tax capital investment at low rates is to encourage saving and investment. Many economists believe that the economically optimal tax on capital gains is zero. ... Almost all economists agree—or at least used to agree—that keeping taxes low on investment is critical to economic growth, rising wages and job creation. ...
Democrats who argue for higher taxes on capital are advocating less investment and dooming workers to fewer jobs at lower wages.