The Dumbest Tax Increase

Biden’s capital-gains rate of 43.4% would reduce federal revenue

WSJ editorial. Excerpts:

"There are good economic and fairness reasons for the preferential rate. First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. Losses can offset gains in any given year, but losses that exceed gains can only be offset against personal income up to $3,000. The preferential rate compensates for this asymmetry.

Second, gains in asset values aren’t adjusted for inflation, so investors who hold assets for an extended period pay taxes on increases that are partly illusory. Other parts of the tax code, including the income-tax brackets, are indexed for inflation, but not capital gains that arguably need it the most since assets are often held for decades.

Third, a capital-gains tax is a second tax on corporate income. A neutral revenue code would tax all income only once. But the U.S. also taxes business profits when they are earned, and President Biden wants to raise that tax rate by a third (to 28% from 21%). When a business distributes after-tax income in dividends, or an investor sells the shares that have risen in value due to higher earnings, the income is taxed a second time."

"The most important reason to tax capital investment at low rates is to encourage saving and investment. Consumption—buying a car or yacht—faces a sales tax but not a federal tax. But if someone saves income and invests in the family business or in stock, he is smacked with another round of tax. Tax something more and you get less of it. Tax capital income more, and you get less investment, which means less investment to improve worker productivity and thus smaller income gains over time."

"a 43.4% federal rate will cost the government money. The Congressional Budget Office says the revenue-maximizing rate for capital gains is about 28%. Other economists say it’s lower, and many think the ideal rate is zero."

"CBO has found that for each 1% increase in the capital-gains rate, there is a 1.2% reduction in realizations. Raise the tax as much as Mr. Biden wants, and realizations will fall significantly. The higher rate will cost the government revenue."