The leak about the second phase of the proposed tax increases on capital gains sent the investment community into a frenzy. While the details of the proposal are not yet known, it appears that the administration is planning to tax capital gains at regular levels of income tax for people with incomes greater than $ 1 million, raising the maximum rate on earnings from 23.8% capital (including the 3.8% investment surcharge) to 43.4% (a higher marginal income tax rate of 39.6% plus the 3.8% surcharge).
If so, there is no doubt that this is a brilliant political move by President Biden and his economic team. During the campaign, President Biden proposed the same plan, albeit with a lower income threshold ($ 400,000) that triggers the higher rate. Raising the threshold to $ 1 million will make it considerably more difficult for opponents to convince the average American that the change may adversely affect the American economy. Read: Biden has vowed to tax the rich, but how exactly will he do it? Experts Consider Your Options However, a brilliant political movement does not equate to a brilliant economic one. If you believe that taxes have an impact on individual economic behavior, then you cannot ignore how a tax increase of almost 100% could change an investor’s actions and create a ripple effect throughout the economy. These impacts could be even greater in the decisions of entrepreneurs. In a 2010 research article, William Gentry, an economics professor at Williams College, highlights the mechanisms through which capital gains taxes impact entrepreneurs: First, these taxes create an additional level of taxes on capital gains. successful entrepreneurs. Second, asymmetric taxation, in which profits are taxed more than losses, could discourage risk taking. For example, if your capital losses exceed your capital gains, the amount of the excess loss that you can claim is limited to a maximum of $ 3,000 ($ 1,500 if you are married filing separately). Third, high rates of capital gains can block entrepreneurs, preventing the sale of assets to more efficient managers. And finally, these taxes can affect the cost of capital for entrepreneurs. The third mechanism is especially important: Business dynamism has been a cause for concern in the US In recent decades, we have seen a decline in new business formation, worker flows, and job creation and destruction. Many economists believe that this is a “worrying trend because an important factor in productivity growth is the reallocation of resources from the least productive firms to the most productive ones.” Obviously, the tax structure is not the only reason for this trend: regulatory barriers and education are some of those to mention. But a tax system that privileges consumption over saving and investment contributes to this downward trend. In simple words, the more money that is taken out of the mutual fund through taxes, the less is available for entrepreneurs to reinvest, grow, and hire more people. This does not even take into account the indirect revenue that the government collects through income and employment taxes as a result of business activity. Others will insist on the fact that government revenue could also decline as a result of a significant increase in capital gains tax rates or what this increase would look like when combined with state tax rates (topping 55% in California , for example). These are all valid points, and an open discussion and research update would be welcome in light of changing economic structures. Read: Biden’s first big speech in Congress is on Wednesday. This is what to expect. For an administration that wants to rebuild an economy with 21st century priorities, increased investment should be at the top of the list. Yes, government investment is important in certain areas such as infrastructure, R&D and education, but the private sector cannot be left behind and must have all the tools to explore productive opportunities. Tax is one that we have in our toolbox and we must carefully consider the long-term impacts of such actions. This is not to rule out the fact that tax revenue is badly needed to fund a number of priorities; however, we need to determine the right tax mix to achieve these goals without distorting vital decisions in an economy that could generate much-needed economic growth and job creation. Now Read Mark Hulbert: Why Wouldn’t Increasing the Capital Gains Tax Rate Plunge Stocks? Also: Where did Biden go wrong in his first 100 days? Well done? Analysts ring. Pinar Çebi Wilber is Executive Vice President and Chief Economist of the American Council for Capital Formation, a think tank based in Washington, DC.