It was announced today that the Biden administration wants to raise the capital gains tax to 40 percent from its current, 20 percent at the federal level. As you can imagine, he is on a hunt for a way to pay for the Sanders/D.O.C. socialist promise bomb to which he has strapped himself. He could just have Janet Yellen (US Treasurer) and Fed chief Powell get money in the new (unproven and dangerous) Modern Monetary Theory (MMT) way. But that would not accomplish the goals of his keepers.
He also has to find some way to hurt those darn successful folks by getting his hands on their income. After, who do they think they are? Just because they work hard running businesses and pay most of everyone else’s taxes, doesn’t mean that there isn’t another way to wave the equality flag. So, he or some of his keepers resurrected the nearly decennial idea of raising the capital gains rate.
As you know, the capital gains tax is applied to realized capital gains that may be lurking in your investment portfolio, or real estate, or other assets else that grows in value, free of exposure to the tax. When you sell the assets, as many retired people are doing today with the accumulated conventional IRA balances, or when they die, the Tax Man wants his taste. It annoys whose who think they deserve to spread your wealth around to their friends, that you get to choose when the gains are realized when sold. No matter that much of the gains may be purely embedded inflation, or that you may also have financed and managed a business.
No matter, also, that even 25 years ago, it was known that it is not just rich that invest. Indeed, a NASDAQ exchange survey found just those that held stock were very driverse: 43 percent of the adult population did so; 47 percent of women did so; 55 percent of those younger that 50 did so; and 50 percent weren’t even college graduates. You know the demographics today are even more diverse. Old gray-beards don’t try putting the short-squeeze on trades in their a compupter game stock. The important thing is that a capital gains transaction put folks money in play, and affords Joe the opportunity to snatch-and-grab some of that.
So, the economists Sarin, Summers, Zidar, and Zwick in 2021, crafted a paper (unrefereed) that asserts that the scoring of the revenue potential of such a move could be more remunerative than others had found. Scoring is the review by the OMB of such aspects of fiscal efforts. They did not report that the OMB’s revenue scoring in the 1990s, in practice, was off by a factor of 2 every year. In this case, they had scored the effect of cutting the capital gains tax. However, the fact that cutting the capital gains tax underestimated revenues strongly suggests that an increase in the rate is likely to have the reverse experience, and underproduce revenue and throttle investment.
