In his State of the Union Address, President Obama called for tax increases on the wealthy, such as by increasing the top tax rate on capital gains and dividends, and by imposing what is effectively double taxation on inheritances (by imposing both estate taxes and capital gains taxes on the very same asset). Obama also wants to tax the not-so-wealthy, such as taxing many college savings plans.
Double taxation would also increase due to the tax increases on dividends proposed by Obama, since companies pay income taxes on their earnings before paying them out to investors as dividends. The new tax rate on capital gains and dividends would be 13 percent higher than when Obama took office (the rate had previously increased due to new taxes included in the 2010 Obamacare law).
If the new tax increases go into effect, America will be going in the opposite direction from the rest of the world, as other countries have reduced capital gains taxes to encourage investment and create jobs. As Chris Edwards of the Cato Institute notes:
Low capital gains rates are crucially important for spurring entrepreneurship, investment, and growth. Recognizing that, nearly every other high-income nation has reduced capital gains tax rates. The average top long-term rate in the 34 Organization for Economic Cooperation and Development (OECD) nations is just 18 percent, according to Tax Foundation. By contrast, the U.S. rate, including both federal and state taxes, would jump to 32 percent under the Obama plan — far higher than the rate in most other nations.
The proposed increase would undermine America’s tax competiveness. As Edwards observes:
When Canada cut its federal capital gains tax rate to 14.5 percent a number of years ago, a parliamentary report recommended that “international competitiveness be the criterion guiding the choice of a capital gains tax regime.” The higher are U.S. tax rates on capital, the more job-creating investments will be scared away.
Sometimes, increasing capital gains tax rates is so economically harmful that it actually reduces government revenue.
The tax increases sought by Obama will result in more taxes for people who have not gotten any richer in real terms. Many so-called “capital gains” are the result of inflation, not increases in real value, and capital gains taxes thus punish thrifty people for inflation. As Edwards further notes:
If an individual buys a stock for $10 and sells it years later for $12, part of the $2 in capital gains will be inflation. By taxing inflation, the tax code reduces real returns, and thus suppresses investment, particularly in growth companies. A lower statutory rate partly solves the problem.
These tax increases are not needed to make the tax code “progressive,” since it already is quite progressive. Even back in 2012, before taxes on the wealthy increased due to Obama’s 2013 fiscal-cliff tax deal and a new investment tax, the U.S. already had a more progressive tax code than most European countries, noted Veronique de Rugy of the Mercatus Center:
The richest 10 percent of U.S. households (those making $112,124 or more) contribute a greater share of taxes (45.1 percent of all income taxes) than their counterparts in any other industrialized nation.
Meanwhile, the average tax burden for the top 10 percent of households in OECD countries is 31.6 percent of the revenue collected, well below the percentage in America.
Interestingly, in France, a notorious welfare-state government, only 28 percent of revenue comes from the top 10 percent of income earners. As for the top 1 percent of Americans, their share of federal taxes paid is roughly 30 percent.
As The Wall Street Journal notes, Obama’s earlier proposals sought to give the U.S. one of the highest capital gains tax rates in the world—higher than all but one European country. Liberal legislators like Congressman Jerry McNerney (D-Cal.) have also advocated raising income taxes by imposing a 90 percent tax rate on the wealthy.
Far from being too low, current capital gains taxes are too high, since they tax some people based on essentially fictitious paper income even when those people have become much poorer rather than richer. A liberal economist and Federal Reserve Board member conceded in 1980 that “most capital gains were not gains of real purchasing power at all, but simply represented the maintenance of principal in an inflationary world.” “Between 1970 and 1980, U.S. stock prices fell by half after being adjusted for inflation. But if you sold stock in 1980, after a decade of getting poorer and poorer you would have had to pay capital gains tax.