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Louis DeBroux / April 28, 2021

Double the Capital Gains Tax to Crush the Economy

Joe Biden’s proposal is just the latest terrible idea coming from an extreme-left administration.

If further proof were needed that supposedly moderate Joe Biden is every bit the leftist ideologue as “the first mainstream African American who is articulate and bright and clean” under whom he served as vice president, look no further than the trial balloon Biden floated to nearly double the capital gains tax.

In 2008, during a primary debate with Hillary Clinton, Barack Obama proposed increasing the capital gains tax, even when history shows that increasing it results in a decrease in federal revenues. So why do it? “For purposes of fairness,” Obama said.

At the time, Obama said he would not go higher than the Clinton-era rate of 28%, yet Biden floated nearly doubling the current rate of 23.8% (including a 3.8% ObamaCare surcharge) to a staggering 43.4%. How do you like that “fairness”?

Yet whether for purposes of fairness or raising revenue, a capital gains tax rate increase is counterproductive. For one thing, as a revenue-raiser, the capital gains tax rate fails miserably.

None other than former Democrat President John F. Kennedy warned, “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy.”

In other words, a high tax rate on capital gains changes the decision-making process of investors from creating wealth (and therefore jobs and increased wages) to minimizing the punitive effect of taxation. As a result, the proverbial national economic pie shrinks, jobs are lost, and wages shrivel. Such taxes also discourage savings and investment, which also hurts economic growth.

Former Federal Reserve Governor Larry Lindsey argues the revenue-maximizing rate for capital gains is around 28%. Other economists argue for a much lower rate. But no sane person argues for a rate in excess of 40%.

Leftist Democrats argue that the lower rate for capital gains, when compared to the individual income tax rate, is an unfair loophole that needs to be closed. That is not remotely true.

Under current tax law, capital gains from investments are fully taxed, but only a portion of losses are deductible. And since asset values are not indexed to inflation, investors are penalized by paying taxes on asset values that partly exist only on paper.

Additionally, the capital gains tax is a double tax on corporate income. The federal government taxes business profits when they’re earned, and Biden wants a 33% increase in the corporate income tax. Then, when businesses issue income on dividends, or an investor sells shares that have appreciated, the federal government hits them with a second tax.

Of course, as we’ve written before, corporations don’t pay taxes. Individuals do.

Maybe that’s why Congressman Jerry Nadler (D-NY), who represents part of the uber-wealthy Manhattan enclave, inadvertently makes the argument against such double taxation when calling for a repeal of the SALT deduction limit. That limit, which was part of the 2017 Republican tax reform, has been painful for big-spending, high-tax states like New York, New Jersey, and California, where combined state and local tax (SALT) rates are already high and could exceed 55% under Biden’s plan.

“No one should ever be taxed twice on the same income,” Nadler declared. “It’s not fair and it’s not just.”

Really, Jerry? Like when you work your tail off as a small business owner, pay business taxes, and pay yourself a salary with what’s left, which is then subject to federal, state, and local taxes? Then, when you go to purchase a car, or just a hamburger, you have to pay a sales tax on that as well. You get to do this for 50 or 60 years, and when you die, the government takes nearly half of your estate through the death tax, and only then gives whatever’s left to your children. Is that fair?

Make no mistake, a repeal in the SALT deduction limits benefits only the very wealthy. According to the liberal Brookings Institute, were the SALT deduction limit to be repealed, 96% of the benefits would go to the top 20% of income earners, with the top 1% seeing 57% of the benefits.

Of course, this does provide for some great entertainment, as Democrat politicians try to spin their preferential tax treatment for the rich as somehow helping the little guy.

In reality, America doesn’t have a taxing problem; it has a spending problem. Politicians like Joe Biden and Jerry Nadler increase spending as a way of buying votes, then increase taxes to (partially) offset the new spending. It’s a vicious cycle that makes everyone poorer — except the politicians and their big donors who pay them to create tax loopholes.

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