A Wrecking Ball to the Economy

With Hillary Clinton’s announcement of her plan to nearly double the capital gains rate for investments held less than six years, Stephen Moore writes that it shows a deep and disturbing ignorance of the effects of the capital gains tax and its impact on growth.

As Mr. Moore points out, Hillary’s plan to raise the capital gains rate will not raise any money. Instead it will hurt small businesses, workers, and American competitiveness. Read Moore here.

The late, great Jack Kemp, an architect of the Reagan tax cuts, used to say “without capital, capitalism is just another ism.” Capital is the plant, the machinery, the computers, and trucks that businesses invest in to become productive and efficient providers of goods and services.

So it’s strange that last week Hillary Rodham Clinton declared war on capital with her plan to nearly double the capital gains rate for investments held less than six years.

The capital gains tax rate fell to 15 percent in the George W. Bush years, was raised 23.8 percent under President Obama, and Mrs. Clinton would jack up the rate to as high as 42 percent — with the rate falling the longer the asset is held.

“This is the worst economic idea of I’ve heard in years,” marvels Larry Kudlow of CNBC. “It’s a wrecking ball to the economy.” Mrs. Clinton’s plan reveals such a deep an disturbing ignorance of the effects of the capital gains tax and its impact on growth that it’s time to bust some of the key myths about ow this tax affects the economy:

1. The tax on capital gains income is much lower than the tax on wages and salaries of the working class.

Mrs. Clinton says she would merely tax income from capital at the same rate as middle class Americans have taken from their paychecks. She would tax capital gains as ordinary income for those who make over about $450,000 a year. But this would make taxes on capital income punitive and here’s why. First, most capital gains come from the sale of financial assets like stock. But publicly held companies have to pay corporate income tax at a rate of 35 percent. Capital gains is a second tax on that income when the stock is sold. So the actual tax rate on capital gains income is closer to 40-50 percent and Mrs. Clinton would raise that to 60 percent.

Second, capital gains is a tax on the increase of the valuation of a stock, but is not adjusted for inflation. So when inflation is high, the capital “gain” can be mostly due to inflation. In other words the gain can be illusory and the tax rate can even rise above 100 percent.

Finally, although we require investors to pay tax on all of their capital gains, they only get to deduct a small share of their losses. So this skews the tax code against risk taking.

2. Raising the capital gains tax will raise billions of dollars for the government.

The Hillary plan is almost all pain with no gain. It’s highly unlikely the tax hike will raise any money for the Treasury and if history is a guide it will lose revenue. After the capital gains tax hike in 1986 from 20 percent to 28 percent, capital gains revenues actually fell from $44 billion a year to $27 billion a year by 1991. After Bill Clinton cut the capital gains tax down to 20% again, capital gains revenues surged from $54 billion in 1996 to $99 billion in 1999. Lower rates, more revenues.

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