January 4, 2021
President-elect Joseph Biden’s tax initiatives, while not law yet, could do tremendous economic damage. A slew of new taxes may be unleashed, including nearly doubling the top capital gains tax, from 23.8 percent to 43.4 percent.
While the Biden team insists its tax increases will apply only to high earners, the truth is they’ll get us all through damaged investment, entrepreneurship, and job opportunities. Additionally, prices of goods and services could jump across the board.
Readers of this blog know I am not a fan of tax increases because they negatively affect the long-term economy. Congress has kept long-term capital gains tax rates low and nearly all other advanced economies offer low capital gains tax rates too.
It’s sound policy because we live in a global world. Capital is mobile and will leave countries with unfavorable tax rates.
Another reason low capital gains rates make sense is inflation. When you hold an investment for years and sell it at a profit, part of that gain is inflation, which isn’t a true return. Nonetheless, you pay taxes on the entire gain. Low capital gains rates offset the silent tax of inflation.
Double taxation is another concern. If expected corporate profits rise, share prices increase, creating a gain. But those future profits are also taxed at the corporate level, in addition to capital gains taxes. So, if the combined rate of those two levies is too high, firms will reduce their investments.
Lastly, high capital gains taxes harm startups and growth-oriented companies. The reward angel investors receive for putting their time and money into startups is a long-term capital gain. Increasing capital gains taxes could cause these investors to move their money elsewhere.
What does this all lead to? Less free enterprise.