Written by Charles Bennett.
President Joe Biden’s recent proposal to increase the capital gains tax to a staggering 44.6% represents a significant shift in tax policy, one that could have far-reaching effects on the economic landscape of the United States. This proposal is part of a broader budget plan that seeks to hike taxes on high earners, ostensibly to fund various ambitious government projects. The notion, however, that increasing taxes on investment returns is a viable solution to funding government spending is not only misguided but potentially disastrous for the economic vitality of the nation.
The proposed increase targets capital gains and qualified dividends for individuals earning more than $1 million, aligning these earnings with the top bracket of ordinary income taxes. While this might sound like a plan that only affects the wealthiest, the implications are much broader. Investors, small business owners, and even retirees planning to sell assets for their retirement could find themselves caught in the crossfire of this tax hike. The chilling effect on investment could stymie economic growth at a time when the country is poised for recovery.
The Flawed Logic of Stifling Investment
The primary issue with Biden’s approach is the fundamental misunderstanding of how capital gains stimulate economic activity. Capital gains taxes affect decisions to invest in businesses, real estate, and innovation—all critical drivers of economic growth. By increasing the tax burden on these investments, the proposal risks not only reducing the quantity and quality of available capital but also discouraging entrepreneurs from taking risks on new ventures. This is particularly concerning in a global economy, where capital mobility allows investors to seek friendlier tax environments abroad.
The impact of such a tax increase is not theoretical but has practical implications for job creation and wages. The Tax Foundation suggests that Biden’s tax plan could lead to the loss of nearly one million jobs, a stark number that illustrates the real-world consequences of diminished investment. Furthermore, by combining these tax hikes with high state taxes, total tax rates on capital gains could exceed 50% in some states, pushing investors to reconsider the viability of funding U.S.-based ventures.
Repercussions Beyond the Wealthy
Contrary to the administration’s portrayal of the tax increase as targeting only the affluent, the ripple effects will likely touch a broader section of the population. Middle-class families relying on investments for retirement, small business owners hoping to sell their businesses to fund their retirement, and even everyday workers whose pensions and savings are invested in the stock market—all stand to be impacted. The narrative that only the wealthy will bear the cost is a simplification that ignores the interconnected nature of our economy.
Moreover, this tax proposal could reverse the benefits seen from the 2017 Tax Cuts and Jobs Act, which was instrumental in boosting investment and economic growth in the U.S. by lowering the corporate tax rate and encouraging profits to be repatriated. The proposed changes threaten to undo these gains, potentially leading to a scenario where the U.S. becomes a less attractive destination for both domestic and foreign investment.
Our Take
President Biden’s capital gains tax proposal is more than just a tax hike; it is a fundamental threat to the economic principles that foster growth and prosperity. It penalizes success and undermines the risk-taking that is so essential to innovation and economic expansion. If implemented, it could lead to a stagnation in investment, a slowdown in job creation, and a decline in the global competitiveness of the United States.
As policymakers debate this proposal, it is crucial to consider the broader implications of such tax increases on the overall health of the nation’s economy and not just the immediate financial implications. A more balanced approach that encourages investment and growth, rather than stifling it with punitive tax measures, will be essential for sustaining the nation’s economic momentum and ensuring a prosperous future for all Americans.
In a society that values fairness and opportunity, it is counterproductive to implement a tax policy that effectively penalizes the very individuals and behaviors that drive economic progress. It is hoped that reasoned debate and a reevaluation of priorities will lead to a policy that supports growth rather than hindering it.
