When a potential new business never opens it doors because it cannot raise the capital to finance the opening, who loses? Most people would say the business owner and the people the business would have employed.
But in the current debate over President Biden’s proposal to increase capital gains taxes by more than 80%, these entrepreneurs and potential employees are the forgotten men and women.
The president and his allies contend that only a few Americans will pay the higher taxes, however that ignores the millions that will pay the price of the proposed tax increases.
As American Action Forum President and former Congressional Budget Office Director Doug Holtz-Eakin astutely points out, the total amount of capital gains hit by the President’s rate increase is an astounding 67%.
The economic models and past history all reach the same conclusion: when you significantly increase taxes on capital gains you get significantly less capital investment. Given that the proposed tax increases from the president would impact two-thirds of capital investment, the impact will be particularly devastating for economic growth and job creation.
Many might assume that the reduction in investment only impacts big businesses, but smaller ones feel the pain too. They need funds from investors to launch their businesses and to grow. Without those funds, they cannot hire workers.
Raising the capital gains rate is also self-defeating from a revenue perspective. When the rate goes up, not only do investors cut back on new investment, those with pre-existing gains hold on to them longer. The end result is less revenue. Both the Tax Foundation and the Penn Wharton Budget Model find that effect. The dumbest tax increase, indeed.
Not only will higher capital gains rates hurt current workers, it will hurt current and future retirees. A higher rate, immediately upon enactment, reduces the value of all stocks. That means everyone saving for retirement, or anyone who has already retired, will see the value of their 401Ks fall.
The problem applies to those with defined benefit plans too, as the assets of those plans would fall. These plans are chronically short of funds and a higher capital gains rate will make that problem worse.
It’s also worth pointing out that these problems with raising the capital gains rate have led to skepticism of the Biden plan from both Republicans and Democrats.
The next time you hear a politician argue that raising taxes is a matter of fairness and that only a few well-off individuals will pay the higher tax, just remember the forgotten men and women who will pay the true cost.
About the authors
Curtis Dubay
Curtis Dubay is Chief Economist, Economic Policy Division at the U.S. Chamber of Commerce. He heads the Chamber’s research on the U.S. and global economies.
