These five myths (and the facts) include:
Myth #1: The tax on capital gains income is much lower than the tax on wages and salaries of the working class.
Most capital gains come from the sale of financial assets, such as stocks. Publicly-held companies pay corporate income tax at a rate of 35%. Capital gains tax is a second tax on that income when the stock is sold. The actual, total tax rate on capital gains income is closer to 40-50%. In addition, capital gains tax is a tax on the increase of the valuation of a stock, which is not adjusted for inflation. When inflation is high, the capital “gain” can be mostly due to inflation—no real gain—raising capital gains tax to 100%+.
Myth #2: Raising the capital gains tax will raise billions of dollars for the government.
Tax hikes rarely raise money for the Treasury. For example: After the capital gains tax hike in 1986 from 20% to 28%, capital gains revenues fell from $44B/year to $27B/year by 1991. After Bill Clinton cut the capital gains tax to 20%, capital gains revenues surged from $54B in 1996 to $99B in 1999. Lower rates equal more revenue.
Myth #3: Raising the capital gains tax is a good way to make the rich pay their “fair share” of taxes.
Although the Warren Buffetts and the Wall Street hedge-fund managers might pay a higher tax bill, they are more likely to hold their stocks longer to avoid the higher tax penalty. That means less capital for corporations, meaning the people who will get hurt are the middle class, minorities, and young people. Why? Corporations produce more when they hire smarter, better trained employees and have more capital to pay higher salaries. Thus, the capital gains tax is an invisible tax on employees' wages. When Bill Clinton cut the capital gains tax, wages and productivity surged.
Myth #4: Raising capital gains taxes won't reduce investment.
High tax rates have a negative effect on the economy because funding for venture capital in new enterprises and the rate of new business startups is inversely related to capital gains taxes. The higher the penalty on risk capital, the fewer new entrepreneurial ventures get started. If investors are to put their money at risk to fund startups, a 50% or 60% capital gains tax increases the probability that investors will take a pass.
Myth #5: Raising the capital gains tax helps the economy.
The U.S. already has the highest corporate tax rate in the world. Increasing the capital gains tax will hurt small businesses, workers, and the nation’s competitiveness. It also won’t raise any money for the Treasury (see Myth #2).
Another one of The Motley Monk’s faves, Larry Kudlow, stated it succinctly: “It’s a wrecking ball to the economy.”
Let the discussion begin...
To read Stephen Moore's article, click on the following link: